STANDARD  BUSINESS 

Banking,  Credit 
and  Finance 


THOMAS  H.  RUSSELL,  A.M.,  LL.D. 

EDITOR-IN-CHIEF 

ASSISTED  BY  A  CORPS  OF 
BUSINESS  EXPERTS 


Copyright  1922 

Whitman  Publishing  Company 

Racine,  Wis. 

Printed  in  United  States  of  America 


u.. 


INTRODUCTION 


A  brief  consideration  of  modem  conditions  will 
enable  the  student  of  business  to  decide  that  the 
more  he  knows  about  the  methods  of  banking  and 
financial  management,  the  better  equipped  he  will 
be  to  seize  the  fleeting  opportunities  of  twentieth- 
century  business  life. 

Every  business  man  has  more  or  less  to  do  with 
banks  and  banking.  It  stands  to  reason  therefore 
that  the  business  man  cannot  obtain  too  much  knowl- 
edge of  banking  methods.  The  greater  his  business, 
the  more  need  he  has  of  specialized  knowledge  on  this 
subject.  It  is  an  important  part  of  a  liberal  educa- 
J  tion  in  Business  Administration. 

V  Individuals  here  and  there  may  think  that  only 
^  bankers  and  young  men  who  aspire  to  become  bank- 
ers or  financiers  may  profitably  study  the  theories, 
history  and  practice  of  banking  and  finance.  But, 
as  a  matter  of  fact,  earnest  and  ambitious  men  of 
all  classes  may  devote  time  and  attention  to  these 
subjects  with  almost  absolute  certainty  that  the 
knowledge  thus  acquired  will  greatly  profit  them 
sooner  or  later.  And  it  may  be  remarked  in  passing 
that  the  opportunities  offered  to  young  men  trained 
in  matters  of  finance  were  never  so  great  or  so  numer- 
ous as  they  are  at  the  present  day.  The  general 
demand  for  specialized  knowledge  in  business  is 


083129 


\ 


4  BANKING,  CREDIT  AND  FINANCE 

fully  exemplified  by  the  strong  demand  for  young 
men  fitted  by  study  to  enter  the  employ  of  the  great 
banks  and  financial  houses  that  are  a  notable  out- 
growth, of  modem  business.  It  is  realized  by  finan- 
ciers generally  that  young  men  thus  partially 
equipped  for  their  services  afford  splendid  material 
for  the  practical  training  in  banking  and  financial 
management  which  can  be  obtained  only  by  actual 
experience  in  the  bank,  trust  company,  or  other 
financial  institution. 

It  must  never  be  forgotten  that  the  bases  of  all 
success  in  the  business  world  of  today  are  Character 
and  Knowledge.  These  may  well  be  linked  together 
side  by  side,  since  it  takes  a  man  of  character  to 
enter  upon  the  conscientious  pursuit  of  knowledge. 
The  young  man  who  possesses  this  combination — 
character  and  knowledge —  is  the  young  man  bankers 
and  financiers  are  looking  for. 

As  the  groundwork  for  study  of  Banking  and 
Finance,  some  knowledge  of  economics  is  desirable, 
especially  that  portion  of  the  science  which  deals 
with  the  theory  of  money,  the  standards  of  value, 
and  the  relation  of  commerce  and  credit.  The  stu- 
dent should  fully  realize  the  importance  of  the  sub- 
ject of  finance,  and  this  can  hardly  be  overestimated; 
for,  as  a  French  writer  sagely  remarked,  "It  must 
be  said,  and  said  whatever  men  may  think  of  it,  that 
the  finances  touch  everything,  help  everything,  con- 
clude everything.  They  are  in  the  state  what 
blood  is  in  the  veins  of  the  human  body;  if  it  circu- 
lates, it  carries  along  with  it  motion  and  life;  if  it 
stops,  paralysis  and  death  supervene.  Good  or- 
ganization, good  administration,  a  good  condition 
of  the  finances,  exert  therefore  imperiously,  every- 


INTRODUCTION 


where  and  always,  a  positive,  healthful  and  vivifying 
action  upon  the  government  of  a  country  and  the 
prosperity  of  its  people." 

Realizing  the  importance  of  the  finances  in  the 
public  economy,  the  student  will  readily  understand 
the  utility  of  banking  in  all  commercial  communities. 
He  will  leana  from  this  volume  how  the  banker 
stands  between  the  capitalist  and  the  borrower, 
as  the  medium  w^hereby  arrangements  are  made  for 
carrying  on  and  expanding  domestic  trade  and  inter- 
national commerce.  He  will  see  why  the  banker 
becomes  a  prominent  and  esteemed  citizen  of  the 
community,  and  how  great  is  the  banker's  influence, 
individually  and  collectively,  in  keeping  business  on 
a  safe  basis;  checking  the  over-enthusiastic  and  the 
purely  speculative,  but  ever  promoting  enterprise 
on  the  part  of  worthy  men. 

The  various  steps  attending  the  organization  of 
a  bank  are  clearly  shown;  also  the  duties  of  directors 
and  officers,  the  fimctions,  rights  and  obligations  of 
shareholders,  requirements  as  to  meetings,  etc.  The 
student  will  leam  how^  bank  accounts  are  opened; 
how  checks  are  drawn,  indorsed,  certified,  etc.;  and 
how  the  deposits  are  handled  by  the  bank ;  also  the 
rights  and  duties  of  depositors. 

The  working  of  the  Federal  Reserve  Bank  System 
inaugurated  in  recent  years,  is  described  at  length, 
with  copious  extracts  from  the  Act  of  Congress 
establishing  this  system  Avhereby  the  banking  in- 
stitutions of  the  United  States  are  largely  protected 
against  the  former  dangers  of  depressions  and 
panics,  and  the  entire  business  community  is  there- 


6  BANKING,  CREDIT  AND  FINANCE 

by  benefited  to  an  appreciable  degree.    The  Federal 
farm  loan  system  is  also  fully  described. 

The  manner  in  which  a  bank  handles  commercial 
paper  and  other  negotiable  instruments  is  not  only 
an  important  but  an  interesting  feature  of  the  sub- 
ject of  banking,  hence  it  should  and  does  receive 
considerable  attention. 

One  of  the  most  responsible  duties  of  a  banker 
is  the  making  of  loans.  The  methods  used  in  banks 
to  judge  of  the  reliability  and  credit  of  applicants 
for  loans  will  well  repay  study,  and  all  engaged  in 
business  should  have  considerable  knowledge  on 
the  point.  In  recent  years  bank  credits  have  been 
reduced  practically  to  a  science.  We  shall  see  how 
this  has  been  brought  about,  and  incidentally  study 
the  whole  question  of  commercial  reports  in  con- 
nection with  bank  credits. 

The  methods  by  which  a  bank  makes  its  collections 
on  commercial  and  other  negotiable  paper  are  dis- 
cussed. These  too  have  been  systematized  within 
the  past  few  years  and  the  student  of  business  can 
assimilate  with  advantage  all  the  information  given 
on  the  subject. 

Every  student  should  also  have  a  thorough  under- 
standing of  the  monetary  system  of  his  own  country. 
We  have  fully  described  the  monetary  system  of  the 
United  States,  including,  first,  the  coinage  of  gold  and 
silver,  and  second,  the  paper  monej^  and  have  also 
given,  at  the  end  of  the  volume,  a  historical  review 
of  the  monetary  events  of  the  world  since  1786, 
which  will  be  found  extremely  useful  for  reference. 

As  part  of  the  monetary  system,  bank  circulation 
is  treated  at  length  and  the  principles  and  methods  of 


INTRODUCTION  7 

making  bank  note  issues  receive  particular  atten- 
tion. 

The  study  of  banking  would  be  incomplete  with- 
out some  knowledge  of  the  system  whereby  the  work 
of  banks  is  facilitated  by  means  of  clearing  houses. 
The  clearing  house  is  remarkable  among  modem 
developments  of  business  as  an  institution  for  the 
exchange  and  settlement  of  checks  drawn  on  a  vari- 
ety of  banks.  It  greatly  economizes  time,  money 
and  labor.  The  methods,  membership,  authority, 
and  organization  of  clearing  houses  are  discussed, 
and  the  operations  of  clearing  and  payment  of  bal- 
ances are  fully  described. 

It  is  astonishing  how  many  men  of  business,  other- 
wise well  informed,  lack  precise  information  upon 
such  matters  as  the  nature  of  bank  reserves  and 
government  requirements  regarding  the  reserve.  Of 
late  years,  there  has  been  a  tendency  on  the  part  of 
banks  to  give  the  public  a  better  understanding  of 
their  periodical  reports,  while  the  establishment  of 
the  central  reserve  bank  system  has  by  its  propa- 
ganda added  to  the  general  information  on  the  sub- 
ject; but  the  average  business  man  and  all  students 
of  business  may  well  read  up  on  this  point,  since  it 
is  an  important  feature  of  American  banking.  No 
one  can  be  said  to  understand  the  methods  of  bank- 
ing unless  he  understands  the  question  of  the  reserve; 
hence  the  matter  is  discussed  at  length  in  these  pages. 

The  question  of  exchange  in  its  relation  to  com- 
merce, both  domestic  and  foreign,  and  to  internation- 
al affairs  generally,  is  of  the  utmost  importance. 
All  matters  pertaining  to  foreign  exchange  are 
particularly  interesting,  and  a  complete  discussion 


8  BANKING,  CREDIT  AND  FINANCE 

of  the  question  will  be  found  in  the  chapters  devoted 
to  the  subject. 

All  business  men  are  interested  in  the  subject  of 
investments,  hence  it  is  well  to  study  the  various 
kinds  of  investments  offered  to  capital,  and  to  obtain 
an  idea  of  the  relative  value  of  each.  The  chapter  on 
this  subject  is  from  the  pen  of  an  investment  expert 
of  international  reputation,  a  Western  banker  held 
in  universal  esteem. 

The  method  followed  throughout  this  work  has 
been  to  deal  chiefly  Avith  j^rinciples  and  methods  of 
more  or  less  general  application  rather  than  with 
individual  or  local  methods.  This  is  for  the  advan- 
tage of  the  great  majority  of  students  of  business, — 
for  the  greatest  good  of  the  greatest  number,  who 
will  be  enabled  by  a  knowledge  of  the  general  prin- 
ciples and  methods  of  banking  and  finance  to  compre- 
hend individual  or  local  variations  in  method  where 
these  may  occur. 

A  knowledge  of  the  history  of  banks  is  desirable 
because  it  gives  a  clearer  understanding  of  the  es- 
sential principles  on  which  modern  banking  systems 
are  founded.  Time  spent  in  studying  the  historical 
section  of  this  volume  will  therefore  be  well  spent, 
and  this  section  while  relegated  to  an  appendix,  will 
be  found  extremely  interesting  in  its  presentation  of 
the  subject. 

Questions  for  periodical  review  of  the  text,  or 
self-examination  on  the  subjects  treated,  have  been 
inserted  for  convenience  at  the  end  of  each  chapter. 

T.  H.  R. 


CONTENTS 


INTRODUCTION 3 

AUTHORITIES  CONSULTED  16 

Chapter  I.     ORIGIN  AND  USE  OF  MONEY 17 

The  Medium  of  Exchange — An  Early 
View  of  Money — Man  Lives  by  Ex- 
change— Effect  of  Division  of  Labor — 
Early  Mediums  of  Exchange — Use  of 
Metal  as  Money — Advantages  of  Metal 
— Various  Metals  Used — Use  of  Crude 
Metals — Origin  of  Coinage — The  First 
Stamped  Metals — Institution  of  Coins 
— Pounds,  Shillings  and  Pence — Val- 
ues Have  Varied — Universal  Instru- 
ment of  Commerce. 

Chapter  II.     BANKS  AND  THEIR  USES  29 

Four  Branches  of  Banking  Business — 
What  Is  a  Banker? — A  Dealer  in 
Money — Private  and  Public  Banks — 
Disposable  Means  of  a  Bank — Banks 
as  Commercial  Institutions — Classifi- 
cation of  Banks — National  Banks — 
Banks  of  Discount  and  Deposit — Sav- 
ings Banks — Trust  Companies — Util- 
ity of  Banks — Safekeeping  of  Money — 
Allowance  of  Interest  —  Loaning  of 
Money — Transmission  of  Money — Ex- 
change of  Currency  —  Economy  of 
Time  —  Collection  of  Drafts  —  The 
Banker  as  a  Reference — A  Record  of 
Expenditures — Safe  I^eposit  for  Valu- 
ables —  Valuable  Help  in  Business — 
Moral  Influence  for  Good. 

9 


10  BANKING,  CREDIT  AND  FINANCE 

Chapter  EL    METHODS  OF  BANKING  49 

Facilities  for  Commerce — Organization 
of  Banks  —  National  Banks  —  State 
Banks— The  Name  "Bank"— Officers 
of  a  Bank — Bank  Loans — ^Use  of  In- 
struments of  Credit — Borrowing  from 
Banks — Rates  for  Loans — When  In- 
terest Accrues — Forged  Indorsements 
— ^The  Credit  Department — Statements 
for  Credit — Paper  Offered  for  Discount 
— Classification  of  Paper — Usury  and 
Its  Penalty — Bank  Examinations — 
Bank  Statements — Bank  Debits  and 
Credits — Accurate  Interest  —  Money 
"On  Call"— Collaterals— The  Bank's 
Cash — Paper  Currency  —  Mutilated 
Currency — Counterfeit  Notas — A  De- 
positor's Credit — Bonds  for  Faithful 
Service — Mercantile  Agencies  —  Sav- 
ings Banks — Defalcations  and  Embez- 
zlements— Commercial  Crises — Emer- 
gency Currency — Clearing-House  Cer- 
tificates— Bankers'  Expedients — Trust 
Companies — Safe  Deposit  Vaults — 
Suggestions  to  Bank  Clerks. 

Chapter  IV.    DEPOSITS  AND  DEPOSITORS  77 

Opening  a  Bank  Account — Deposit  and 
Withdrawal  —  Depositors'  Monthly 
Statement — Arranging  the  Deposits — 
Bank  Checks — Safety  Devices  for 
Checks — When  Figures  and  Words 
Disagree  —  Identification  of  Check- 
Holders — Check  Indorsements — Cash- 
ing Your  Own  Check — Checks  for 
Special  Purposes — "No  Funds" — Stop- 
ping Payment — Canceling  Checks — 
Checks  Presented  After  Death  — 
Checks  Should  Be  Numbered — Certi- 
ficate of  Deposit — Certified  Checks — 
Bank  Drafts  —  "Kiting"  Checks- 
Forged  Checks — ;Personal  Signatures — 
Suggestions  to  Bank  Depositors. 


CONTENTS  11 

Chapter  V.     NOTES  AND  DRAFTS 95 

Promissory  Notes — Date  of  a  Note — 
"Value  Received"  —  Accommodation 
Paper — Title  of  Third  Parties — ^In- 
terest Notes — ^Indorser  of  a  Note — 
Presentation  for  Payment — Protest — 
Date  of  Maturity — Payment  on  a  Note 
— Joint  Note — Signature  to  a  Note — 
Commercial  Drafts — Collections  by 
Draft — Draft  Notices — When  Are  Ac- 
counts Due?  —  Collections  Through 
•  Banks— Three-Party  Draft— "No  Pro- 
test"— Discounting  Drafts  —  Advan- 
tages of  Taking  a  Note — Discounting 
Paper  —  Drafts  and  Bills  of  Lading 
— Overdue  Paper  —  Who  is  a  Bona- 
fide  Holder?  —  Set-Off  —  Notice  of 
Non-Payment  of  Note— A  "Mark"  Sig- 
nature— Power  of  Attorney — Return 
of  Vouchers — Due  Bills — How  Notes 
Differ  from  Other  Contracts — ^Legal 
Tender — Note  Brokers —  Single-name 
Paper  —  Demand  Collateral  Note — 
Waiver  of  Demand  and  Notice — 
Judgment  Note. 

Chapter  VI.     CREDIT  AND  EXCHANGE 112 

Importance  of  Credit — Instruments  of 
Credit — Development  of  Financial  Ex- 
change— Principles  of  Exchange — ^Par 
of  Exchange — Test  of  Exchange — Ef- 
fect on  Foreign  Trade — Changes  in  Ex- 
change Rates — Effect  of  Travel,  etc. — 
Foreign  Exchange  Rates — The  Fall  in 
Exchange — Exchange  Terms — Domes- 
tic Exchange — Cost  of  Shipping  Gold 
— The  World's  Currencies — English 
Money — "Crossed"  Checks  —  British 
Consols — Canadian  Money — Letters  of 
Credit. 


12  BANKING,  CREDIT  AND  FINANCE 

Chapter  VH.    BANK  CREDITS 136 

Facts  Required  from  Borrowers — The 
Subject  of  Credit — Uniform  Statement 
Blank  —  Laws  Governing  Credit — 
Change  of  Methods — Statements  from 
Borrowers — The  Credit  Department — 
Analysis  of  Statements — Principles  and 
Rules  of  Credit  Science — Accuracy  Re- 
quired— Value  of  the  Accountant — 
— Value  of  the  ETngineer — Inaccurate 
and  Dishonest  Statements — Practical 
Features  of  Bank  Credits — ^Typical 
Balance  Sheets — For  Manufacturers — 
For  Commission  Men — For  Jobbers — 
For  Retailers — Proportion  of  Quick 
Assets — Net  Worth  of  Borrowers — 
Assets  and  Sales — Failure  of  Uniform 
Credit  Tests — Importance  of  Credit 
Science. 

Chapter  VIII.     THE  CLEARING  HOUSE  155 

An  Essential  System — Check  Collec- 
tions— ^The  Wanderings  of  Checks — 
General  Rules — Clearing  House  Clerks 
— Foreign  Clearing-Houses. 

Chapter  IX.     THE  FEDERAL  RESERVE  SYSTEM..  163 

Need  of  Government  Control — ^Twelve 
Reserve  Districts — A  New  Epoch  in 
Banking — Main  Features  of  the  Act — 
How  Panics  Are  Prevented — Federal 
Reserve  Agents  —  Attitude  Toward 
Member  Banks — A  Great  Constructive 
Measure — Practical  Guarantee  of  De- 
posits— Amendments  to  the  Act — 
Terms  of  the  Act — Organization  of  Re- 
serve Banks — Capital  Stock  Subscribed 
by  Banks — Branch  Banks — Corporate 
Power  of  Reserve  Banks — Board  of 
Directors — Dividends  and  Franchise 
Tax — Nationalization  of  State  Banks — 
State  Banks  as  Members — Federal  Re- 


CONTENTS  IS 

serve  Board — Powers  of  the  Board — 
Federal  Advisory  Council — Powers  of 
Reserve  Banks — Discount  of  Commer- 
cial Paper  —  Advances  to  Member 
Banks — Government  Deposits  —  Note 
Issues — Reserves  to  Be  Maintained — 
Notes  for  Circulation — Bank  Reserves 
— Bank  Examinations  —  Loans  on 
Farm  Lands  —  Foreign  Branches — 
Gold  Standard  Maintained  —  Federal 
Reserve  Bank  Earnings  —  Banking 
Power  of  the  United  States — Condition 
of  Reserve  Banks. 

Chapter  X.     FEDERAL  LAND  BANK  SYSTEM 200 

Primary  Purpose  of  the  System — ^Fed- 
eral Farm  Loan  Act — ^The  Farm  Loan 
Board — Federal  Land  Banks — Capital 
of  Land  Banks — Farm  Loan  Associ- 
ations— Their  Powers  —  Restrictions 
on  Loans — Agents  of  Federal  Land 
Banks  —  Joint  Stock  Land  Banks — 
General  Provisions  of  the  Act — ^What 
Is  Amortization? — An  Easy  Plan  for 
Farmers — Example — What  Amortiza- 
tion Does  for  Farmers — Making  Ad- 
ditional Payments — Benefits  of  Amor- 
tization— Loans  by  Land  Banks — 
Condition  of  Joint  Stock  Land  Banks. 

Chapter  XI.    THE  COMPTROLLER'S  OFFICE ...... .217 

Supervision  of  Banks — An  Indepen- 
dent Office — Organization  Department 
— National  Bank  Examiners — Depart- 
ment of  Reports — Redemption  Depart- 
ment— Issuing  Department — Insolvent 
Banks — Responsibility  of  the  Office — 
Liquidation  of  Assets. 

Chapter  XII.     MONETARY  SYSTEM  OF  THE  U.  S..  .228 

Gold  and  Silver  Coinage — Provisions  of 
the  Act  of  1873— The  Silver  Act  of 
1878— The  Standard  of  Value— Coins 
and    Paper    Currency — Gold    Coins — 


14  BANKING,  CREDIT  AND  FINANCE 

Silver  Coins — Subsidiary  Silver — Issue 
of  Silver  Dollars  and  Subsidiary  Silver 
—The  Silver  Act  of  1890— Meaning  of 
16  to  1— Standard  Bullion— What  Is 
Seigniorage? — Coinage  of  Gold — Coin- 
age of  Silver — Trade  Dollars — Free  and 
Unlimited  Coinage  of  Silver — Sales  of 
Gold — Redemption  of  Currency — For- 
eign Coins  Not  Legal  Tender — Denom- 
inations, Weight  and  Fineness  of 
United  States  Coins — Paper  Money — 
United  States  Notes — Gold  Certificates 
— Silver  Certificates — Treasury  Notes, 
Act  of  July  14,  1890— Fractional  Cur- 
rency— National  Bank  Currency — Se- 
curity for  Notes — Profits  on  Circula- 
tion. 

Chapter  XIII.     FOREIGN  EXCHANGE  257 

A  Branch  of  Banking — Foreign  De- 
partments Supersede  Brokers — Oppor- 
tunity for  Students — What  Foreign 
Exchange  Is — Magnitude  of  Foreign 
Trade — Knowledge  of  Monetary  Sys- 
tems— The  Only  International  Money 
— How  Gold  Shipments  Are  Handled — 
Commercial  Bars  of  Gold — "Money  of 
Account"  —  The  British  System  — 
"Sterling"  Exchange — Two  Kinds  of 
Exchange — The  Rate  of  Exchange — 
Effect  of  Discount  Rates — Par  of  Ex- 
change— To  Find  the  Par  of  Exchange 
— Commercial  Par  of  Exchange — Quo- 
tations of  Rates — Peculiarity  of  French 
Quotations — German  and  English  Quo- 
tations— Meaning  of  Newspaper  Quo- 
tations— Before  and  After  Clearings. 

Chapter  XIV.     FOREIGN  EXCHANGE   (Continued) .  .280 

Commercial  Bills  of  Exchange — Com- 
merce and  Exchange — A  Typical  Trans- 
action— Foundation  of  Foreign  Ex- 
change— Buying    Commercial    Bills — 


CONTENTS  15 

Hypothecation  Certificates  —  Certifi- 
cates of  Insurance,  etc. — Various  Rates 
of  Discount — The  Bank  of  England 
Rate — Safe  and  Unsafe  Bills — Clean 
Bills  of  Exchange  —  Documentary 
Bills — Revenue  Stamps  on  Drafts — 
Miscellaneous  Charges  — Complicated 
Transactions — German  Requirements 
— Convenience  of  Sterling  Exchange — 
Precautions  against  Wrong  Payment. 

Chapter  XV.     CAPITAL  AND  ITS  CONTROL 299 

Are  You  a  Capitahst? — What  Is  a 
Capitalist  ? — Getting  Along  Without 
Capital — Loans  to  the  Government  as 
Capital — Insurance  Premiums  as  Cap- 
ital— Savings-bank  Deposits  as  Cap- 
ital— Who  Owns  the  Capital  of  the 
Country?— Who  Controls  Capital  To- 
day? 

Chapter  XVI.     INVESTMENTS  319 

Meaning  of  Investment — Bank  Depos- 
its Are  Largely  Credits — Little  Actual 
Cash  Demanded  —  The  Potency  of 
Credit — Recent  Expansion  of  Credit 
— Effect  of  Public  Confidence — Funds 
Available  for  Investment  —  Increase 
of  Investment  Securities  —  What 
Constitutes  Desirability  ? 

Chapter  XVII.     THE  STOCK  EXCHANGE 346 

Economic  Values — Business  on  the  Ex- 
change— The  London  Exchange — List- 
ing of  Stock  —  Technical  Terms  of 
Stock  Exchanges. 

Chapter  XVIII.     MONETARY  EVENTS  SINCE  1786.  .359 

Appendix— HISTORY  OF  BANKING 370 

PROVISIONS  OF  THE  EDGE  ACT 423 

INDEX    ^ 435-448 


AUTHORITIES  CONSULTED 


W.  J.  ASHLEY,  M.  A.,  professor  of  Economic  History  in  Har- 
vard University;  author  of  "An  Introduction  to  English  Economic 
History  and  Theory." 

HARRY  C.  BENTLEY,  C.  P.  A.,  author  of  "Corporate  Finance 
and  Accounting." 

ALBERT  S.  BOLLES,  Ph.D.,  LL.D.,  Author  of  "Money,  Banking, 
and  Finance." 

H.  K.  BROOKS,  manager.  Western  Financial  Department,  Amer- 
ican Express  Company. 

WILLIAM  MORSE  COLE,  A.M.,  professor  in  the  Graduate  School 
of  Business  Administration,  Harvard  University. 

SEYMOUR  EATON,  Director  of  the  Department  of  Industry  and 
Finance,  Drexel  Institute,  Philadelphia;  author  of  "How  To  Do  Busi- 
ness." 

JAMES  H.  ECKELS,  fonner  Comptroller  of  the  Currency;  author 
of  "The  Methods  of  Banking,"  etc. 

DAVID  R.  FORGAN,  president  of  the  National  City  Bank  of 
Chicago. 

J.  W.  GILBART,  F.  R.  S.,  formerly  Director  and  General  Manager 
of  the  London  and  Westminster  Bank;  author  of  "The  History,  Prin- 
ciples, and  Practice  of  Banking." 

THOMAS  H.  GODDARD,  author  of  "History  of  Banking  Insti- 
tutions of  Europe  and  the  United  States." 

WM.  A.  SCOTT,  director  of  Course  in  Commerce,  University  of 
Wisconsin;  author  of  "Money  and  Banking,"  etc.,  etc. 

ARTHUR  B.  SHELTON,  Secretary  of  the  National  Monetary 
Commission,  Washington,  D.  C. 

BYRON  E.  WALKER,  president  of  The  Canadian  Bank  of  Com- 
merce, Toronto. 

JOHN  WIECHERS,  president  of  the  Farmers'  and  Merchants' 
Bank,  Racine,  Wis. 


16 


CHAPTER  I 

Origin  and  Use  of  Money 

Section  1.  The  Medium  of  Exchange. — Money 
is  both  a  medium  of  exchange  and  a  measure  of  vahie, 
but  its  primary  economic  function  is  that  of  a  me- 
dium of  exchange.  It  also  has  a  subordinate  function, 
as  a  standard  of  value,  but  the  fact  of  fundamental 
importance  is  that  it  furnishes  the  community  with 
a  medium  of  exchange. 

It  makes  little  difference  what  the  substance  is 
that  is  recognized  as  money.  It  msiy  be  gold  or  sil- 
ver, nickel  or  copper,  furs  or  wampum,  grain  or  salt 
— whatever  serves  as  a  instrument  for  the  exchange 
of  commodities  between  man  and  man  is  money,  no 
matter  how  crudely  it  performs  the  function. 

When  we  speak  of  money,  we  commonly  have  in 
mind  gold  and  silver,  or  the  coinage  of  base  metals, 
such  as  are  employed  by  civilized  nations  for  their 
fractional  currency;  but  it  is  well  to  remember  that 
the  functions  of  money  have  been,  and  are  today 
among  primitive  peoples,  served  by  a  wide  variety  of 
other  objects  and  substances.  It  is  not  the  sub- 
stance itself,  therefore,  that  we  designate  as  money, 
but  a  substance  which,  by  law  or  custom  becomes 
invested  with  utility  as  a  means  of  exchange,  and 

17 


18  BANKING,  CREDIT  AND  FINANCE 

thereupon  also  becomes  an  object  of  universal  desire, 
because  it  will  procure  for  us  whatever  we  desire. 

§  2.  An  Early  View  of  Money. — The  true  origin 
and  function  of  money  were  expounded  at  least  as 
early  as  the  second  century,  when  Paullus,  the  great 
Roman,  wrote:  ''The  origin  of  buying  and  selling  is 
in  exchange.  Formerly  there  were  no  coins,  and  mer- 
chandise was  in  no  way  distinguished  from  money. 
Every  man,  according  to  the  necessity  of  the  time 
and  of  things,  exchanged  what  was  useless  to  him 
for  what  was  useful,  and  it  was  generally  the  case 
that  what  one  had  abundance  of,  another  was  de- 
ficient in.  But  as  it  did  not  always  easily  happen 
that  when  one  person  had  what  another  desired,  that 
other  had  also  what  the  first  desired,  a  substance  was 
chosen  whose  general  and  durable  value  obviated  the 
difficulties  of  exchange  by  being  a  common  mea- 
sure. This  substance,  having  received  a  public 
stamp,  has  use  and  value  less  as  a  material  than  as 
a  quantity,  and  is  no  longer  called  merchandise,  but 
money.'' 

§  3.  Man  Lives  by  Exchange. — When  the  divi- 
sion of  labor  has  been  once  thoroughly  established  in 
a  community  said,  Adam  Smith,  it  is  but  a  very  small 
part  of  a  man's  wants  which  the  produce  of  his  own 
labor  can  supply.  He  supplies  the  far  greater  part 
of  them  by  exchanging  that  surplus  part  of  the  pro- 
duce of  his  ownlabor,  which  is  over  and  above  his  own 
consumption,  for  such  parts  of  the  produce  of  other 
men's  labor  as  he  has  occasion  for.  Every  man  thus 
lives  by  exchanging  or  becomes  in  some  measure  a 
merchant,  and  the  community  itself  grows  to  be 
what  is  properly  a  commercial  society. 


ORIGIN  AND  USE  OF  MONEY  19 

§  4.  Effect  of  Division  of  Labor. — But  when  the 
division  of  labor  first  began  to  take  place,  this  power 
of  exchanging  must  frequently  have  been  very  much 
clogged  and  embarrassed  in  its  operations.  One 
man,  we  may  suppose,  has  more  of  a  certain  commod- 
ity than  he  himself  has  occasion  for,  while  another 
has  less.  The  former  consequently  would  be  glad  to 
dispose  of,  and  the  latter  to  purchase,  a  part  of  this 
superfluity.  But  if  this  latter  should  happen  to 
have  nothing  that  the  former  stands  in  need  of,  no 
exchange  can  be  made  between  them.  The  butcher 
has  more  meat  in  his  shop  that  he  himself  can  con- 
sume, and  the  dairyman  and  the  baker  would  each 
of  them  be  Avilling  to  purchase  a  part  of  it.  But  they 
have  nothing  to  offer  in  exchange  except  the  differ- 
ent productions  of  their  respective  trades,  and  the 
butcher  is  already  provided  with  all  the  bread  and 
milk  which  he  has  immediate  occasion  for.  No  ex- 
change can,  in  this  case,  be  made  between  them.  He 
cannot  be  their  merchant,  nor  they  his  customers; 
and  they  are  all  of  them  thus  mutually  less  service- 
able to  one  another. 

In  order  to  avoid  the  inconvenience  of  such  situa- 
tions every  prudent  man  in  every  period  of  society, 
after  the  first  establishment  of  the  division  of  labor, 
must  naturally  have  endeavored  to  manage  his  af- 
fairs in  such  a  manner  as  to  have  at  all  times  by  him, 
besides  the  peculiar  produce  of  his  own  industry,  a 
certain  quantity  of  some  one  commodity  or  other, 
such  as  he  imagined  few  people  would  be  likely  to 
refuse  in  exchange  for  the  produce  of  their  industry. 

§■  5.  Early  Mediums  of  Exchange. — Many  dif- 
ferent commodities  were  successively  thought  of  and 


20  BANKING,  CREDIT  AND  FINANCE 

employed  for  this  purpose.  In  the  rude  ages  of  so- 
ciety, cattle  are  said  to  have  been  the  common  in- 
strument of  commerce;  and,  though  they  must  have 
been  a  most  inconvenient  one,  yet  in  olden  times 
we  find  things  were  frequently  valued  according  to 
the  number  of  cattle  Avhich  had  been  given  in  ex- 
change for  them.  Thus,  the  armor  of  Diomede,  says 
Homer,  cost  only  nine  oxen,  but  that  of  Glaucus  cost 
a  hundred  oxen.  Salt  was  formerly  the  common 
instrument  of  coromerce  and  exchanges  in  Abys- 
sinia; a  species  of  shells  in  some  parts  of  the  coast  of 
India;  dried  cod  in  Newfoundland;  tobacco  in 
Virginia;  sugar  in  some  of  the  West  Indies;  hides  or 
dressed  leather  in  other  countries;  and  as  late  as 
Adam  Smith's  day  there  was  a  village  in  Scotland 
where  it  was  not  uncommon  for  a  workman  to  carry 
nails  instead  of  money  to  the  baker's  shop  or  the  ale- 
house. 

§  6.  Use  of  Metal  as  Money. — ''In  all  countries, 
however,  men  seem  at  last  to  have  been  determined 
by  irresistible  reasons  to  give  the  preference,  for  this 
employment,  to  metals  above  every  other  commodity. 
Metals  can  not  only  be  kept  with  as  little  loss  as 
any  other  commodity,  scarce  anything  being  less  per- 
ishable than  they  are;  but  they  can  likewise,  without 
any  loss,  be  divided  into  any  number  of  parts,  as 
by  fusion  those  parts  can  easily  be  reunited  again; 
a  quality  which  no  other  equally  durable  commodities 
possess,  and  which  more  than  any  other  quality 
renders  them  fit  to  be  the  instruments  of  commerce 
and  circulation. 

§'  7.  Advantages  of  Metal. — "The  man  who 
wanted  to  buy  salt,  for  example,  and  had  nothing  but 


ORIGIN  AND  USE  OF  MONEY  21 

cattle  to  give  in  exchange  for  it,  must  have  been 
obliged  to  buy  salt  to  the  value  of  a  whole  ox,  or  a 
whole  sheep,  at  a  time.  He  could  seldom  buy  less 
than  this,  because  what  he  was  to  give  for  it  could 
seldom  be  divided  without  loss;  and  if  he  had  a  mind 
to  buy  more,  he  must,  for  the  same  reasons,  have  been 
obliged  to  buy  double  or  triple  the  quantity;  the 
value,  to  wit,  of  two  or  three  oxen,  or  of  two  or  three 
sheep.  If,  on  the  contrary,  instead  of  sheep  or  oxen, 
he  had  metals  to  give  in  exchange  for  it,  he  could 
easily  proportion  the  quantity  of  the  metal  to  the 
precise  quantity  of  the  commodity  which  he  had 
immediate  occasion  for." 

§  8.  Various  Metals  Used. — Different  metals 
have  been  made  use  of  by  different  nations  for  this 
purpose.  Iron  was  the  common  instrument  of  com- 
merce among  the  ancient  Spartans;  copper  among 
the  ancient  Eomans;  and  gold  and  silver  among  all 
rich  and  commercial  nations. 

Those  metals  seem  originally  to  have  been  made 
use  of  for  this  purpose  in  rude  bars,  without  any 
stamp  or  coinage.  Thus  we  are  told  by  Pliny,  upon 
the  authority  of  Timaeus,  an  ancient  historian,  that, 
till  the  time  of  Servius  TuUius,  the  Romans  had 
no  coined  money,  but  made  use  of  unstamped  bars 
of  copper,  to  purchase  whatever  they  had  occasion 
for.  These  rude  bars,  therefore,  performed  at  this 
time  the  function  of  money. 

§  9.  Use  of  Crude  Metals. — The  use  of  metals  in 
this  crude  state  was  attended  with  two  very  consider- 
able inconveniences;  first,  the  trouble  of  weighing; 
and,  secondly,  that  of  assaying  them.  In  the  precious 
metals,  where  a  small  difference  in  the  quantity 


22  BANKING,  CREDIT  AND  FINANCE 

makes  a  great  difference  in  the  value,  even  the  busi- 
ness of  weighing,  with  proper  exactness,  requires  at 
least  very  accurate  weights  and  scales.  The  weigh- 
ing of  gold  in  particular  is  an  operation  of  some 
nicety.  In  the  coarser  metals,  indeed,  where  a  small 
error  would  be  of  little  consequence,  less  accuracy 
would,  no  doubt,  be  necessary.  Yet  we  should  find 
it  excessively  troublesome,  if  eveiy  time  a  poor  man 
had  occasion  either  to  buy  or  sell  a  copper's  worth 
of  goods,  he  was  obliged  to  weigh  the  copper  coin. 

The  operation  of  assaying  is  still  more  difficult, 
still  more  tedious,  and,  unless  a  part  of  the  metal  is 
fairly  melted  in  the  crucible,  with  proper  dissolvents, 
any  conclusion  that  can  be  drawn  from  it  is  extremely 
uncertain. 

Before  the  institution  of  coined  money,  however, 
unless  they  went  through  this  tedious  and  difficult 
operation,  people  must  always  have  been  liable  to 
the  grossest  frauds  and  impositions,  and  instead  of 
a  pound  weight  of  pure  silver,  or  pure  copper,  might 
receive  in  exchange  for  their  goods  an  adulterated 
composition  of  the  coarsest  and  cheapest  materials, 
which  had,  however,  in  their  outward  appearance, 
been  made  to  resemble  those  metals. 

§  10.  Origin  of  Coinage. — To  prevent  such  abuses, 
to  facilitate  exchanges,  and  thereby  to  encour- 
age all  sorts  of  industry  and  commerce,  it  has  been 
found  necessary,  in  all  countries  that  have  made  any 
considerable  advances  toward  improvement,  to  affix 
a  public  stamp  upon  certain  quantities  of  such  par- 
ticular metals  as  were  in  those  countries  commonly 
made  use  of  to  purchase  goods.  Hence  the  origin  of 
coined  money,  and  of  the  public  offices  called  mints ; 


ORIGIN  AND  USE  OF  MONEY  23 

institutions  exactly  of  the  same  nature  with  those 
of  the  ancient  alnagers  (inspectors)  and  stamp- 
masters  of  woolen  and  linen  cloth.  All  of  them  are 
equally  meant  to  establish,  by  means  of  a  public 
stamp,  the  quantity  and  uniform  goodness  of  those 
different  commodities  when  brought  to  market. 

§  11.  The  First  Stamped  Metals.— The  first  pub- 
lic stamps  of  this  kind  that  were  affixed  to  the  cur- 
rent metals  used  as  money  seem  in  many  cases  to 
have  been  intended  to  ascertain,  what  it  was  both 
most  difficult  and  most  important  to  ascertain,  the 
goodness  or  fineness  of  the  metal,  and  to  have  re- 
sembled the  sterling  mark  which  is  at  present  affixed 
to  plate  and  bars  of  silver,  or  the  Spanish  mark  which 
is  sometimes  affixed  to  ingots  of  gold,  and  which 
being  struck  only  upon  one  side  of  the  piece,  and 
not  covering  the  whole  surface,  establishes  the  fine- 
ness, but  not  the  weight  of  the  metal.  Abraham 
weighed  to  Ephron  the  four  hundred  shekels  of 
silver  which  he  had  agreed  to  pay  for  the  field  of 
Machpelah.  They  were  said,  however,  to  be  "the 
current  money  of  the  merchant,"  and  yet  were  re- 
ceived by  weight  and  not  by  count,  in  the  same  man- 
ner as  ingots  of  gold  and  bars  of  silver  are  at  present. 

The  revenues  of  the  ancient  Saxon  kings  of  Eng- 
land are  said  to  have  been  paid,  not  in  money  but  in 
kind,  that  is,  in  victuals  and  provisions  of  all  sorts. 
William  the  Conqueror  introduced  the  custom  of 
paying  them  in  money.  This  money,  however,  was, 
for  a  long  time,  received  at  the  exchequer  by  weight 
and  not  by  count. 

§  12.  Institution  of  Coins. — The  inconvenience 
and  difficulty  of  weighing  those  metals  with  exact- 


24  BANKING,  CREDIT  AND  FINANCE 

ness  gave  occasion  to  the  institution  of  coins,  of 
which  the  stamp,  covering  entirely  both  sides  of 
the  piece  and  sometimes  the  edges,  too,  was  sup- 
posed to  certify  not  only  the  fineness,  but  the  weight, 
of  the  metal.  Such  coins,  therefore,  were  received 
by  count,  as  at  present,  without  the  trouble  of  weigh- 
ing. 

The  denominations  of  those  coins  seem  originally 
to  have  expressed  the  weight  or  quantity  of  metal 
contained  in  them.  In  the  time  of  Servies  Tullius, 
who  first  coined  money  at  Rome,  the  Roman,  "as"  or 
"pondo"  contained  a  pound  of  good  copper.  It  was 
divided  in  the  same  manner  as  the  English  troy 
(from  Troyes,  France)  pound,  into  twelve  ounces, 
each  of  which  contained  a  real  ounce  of  good  cop- 
per. 

§•  13.  Pounds,  Shillings,  and  Pence. — The  Eng- 
lish pound  sterling,  in  the  time  of  Edward  I,  con- 
tained a  pound.  Tower  weight,  of  silver  of  a  known 
fineness.  The  Tower  pound  seems  to  have  been 
something  more  than  the  Roman  pound,  and  some- 
thing less  than  the  troy  pound.  This  last  w^as  not 
introduced  into  the  mint  of  England  till  the  18th 
year  of  Henry  VIII. 

The  French  livre  contained  in  the  time  of  Charle- 
magne a  pound,  troy  weight,  of  silver  of  a  known 
fineness.  The  fair  of  Troyes  in  Champaign  was  at 
that  time  frequented  by  all  the  nations  of  Europe, 
and  the  weights  and  measures  of  so  famous  a  market 
were  generally  known  and  esteemed. 

The  Scots  money  pound  contained,  from  the  time 
of  Alexander  the  First  to  that  of  Robert  Bruce,  a 
pound  of  silver  of  the  same  weight  and  fineness 


ORIGIN  AND  USE  OF  MONEY  25 

with  the  English  pound  sterling.  English,  French, 
and  Scots  pennies  also  contained  all  of  them  origin- 
ally a  real  pennyweight  of  silver,  the  twentieth  part 
of  an  ounce,  and  the  two  hundred  and  fortieth  part 
of  a  pound. 

The  shilling,  too,  seems  originally  to  have  been 
the  denomination  of  a  weight.  '^When  wheat  is  at 
twelve  shillings  the  quarter,"  says  an  ancient  stat- 
ute of  Henry  III,  *'then  wastel  bread  of  a  farthing 
shall  weigh  eleven  shillings  and  fourpence." 

The  proportion,  however,  between  the  shilling  and 
either  the  penny  on  the  one  hand,  or  the  pound  on 
the  other,  seems  not  to  have  been  so  constant  and 
uniform  as  that  between  the  penny  and  the  pound. 
Among  the  ancient  Saxons  a  shilling  appears  at  one 
time  to  have  contained  only  five  pennies,  and  it  is 
not  improbable  that  it  may  have  been  as  variable 
among  them  as  among  their  neighbors,  the  ancient 
Franks. 

§  14.  Values  Have  Varied.— From  the  time  of 
Charlemagne  among  the  French,  and  from  that  of 
William  the  Conqueror  among  the  English,  the  pro- 
portion between  the  pound,  the  shilling,  and  the 
penny,  seems  to  have  been  uniformly  the  same  as 
at  present,  though  the  value  of  each  has  been  very 
different.  For  in  every  country  of  the  world,  says 
the  author  of  **The  Wealth  of  Nations,"  the  avarice 
and  injustice  of  princes  and  sovereign  states,  abus- 
ing the  confidence  of  their  subjects,  have  by  degrees 
diminished  the  real  quantity  of  metal  which  had  been 
originally  contained  in  their  coins.  The  Roman 
**as,"  in  the  latter  ages  of  the  republic,  was  reduced 
to  the  twenty-fourth  part  of  its  original  value,  and, 


26  BANKING,  CREDIT  AND  FINANCE 

instead  of  weighing  a  pound,  came  to  weigh  only 
half  an  ounce.  The  English  pound  and  penny  con- 
tain at  present  about  a  third  only,  and  the  French 
pound  and  penny  about  a  sixty-sixth  part  of  their 
original  value. 

By  means  of  those  operations  the  princes  and 
sovereig-n  states  which  performed  them  were  en- 
abled, in  appearance,  to  pay  their  debts  and  fulfiU 
their  engagements  with  a  smaller  quantity  of  silver 
than  would  otherwise  have  been  requisite.  It  was 
indeed  payment  in  appearance  only;  for  their  credi- 
tors were  really  defrauded  of  a  part  of  what  was  due 
to  them.  All  other  debtors  in  the  state  were  allowed 
the  same  privilege,  and  might  pay  with  the  same  nom- 
inal sum  of  the  new  and  debased  coin  whatever  they 
had  borrowed  in  the  old.  Such  operations,  therefore, 
have  always  proved  favorable  to  the  debtor,  and 
ruinous  to  the  creditor,  and  have  sometimes  produced 
a  greater  and  more  universal  revolution  in  the  for- 
tunes of  private  persons  than  could  have  been  oc- 
casioned by  a  very  great  public  calamity. 

§  15.  Universal  Instrument  of  Commerce. — 
Money  has  now  become  in  all  civilized  nations  the 
universal  instrument  of  commerce,  by  the  inter- 
vention of  which  goods  of  all  kinds  are  bought  and 
sold,  or  exchanged  for  one  another. 

The  rules  which  men  naturally  observe  in  ex- 
changing them  either  for  money  or  for  one  another 
determine  what  may  be  called  the  relative  or  ex- 
changeable value  of  goods. 

The  word  *' value,''  it  is  to  be  observed,  has  two 
different  meanings,  and  sometimes  expresses  the  util- 
ity of  some  particular  object,  and  sometimes  the 


ORIGIN  AND  USE  OF  MONEY  27 

power  of  pui'chasing  other  goods  which  the  posses- 
sion of  that  object  conveys.  The  one  may  be  called 
''value  in  use/'  the  other,  "value  in  exchange."  The 
things  which  have  the  greatest  value  in  use  have 
frequently  Kttle  or  no  value  in  exchange;  and  on 
the  contrary,  those  which  have  the  greatest  value  in 
exchange  have  frequently  little  or  no  value  in  use. 
JNothmg  IS  more  useful  than  water;  but,  generally 
speaking,  it  will  purchase  scarcely  anything;  scarcely 
anythmg  can  be  had  in  exchange  for  it.  A  diamond, 
on  the  contrary  ,  has  scarcely  any  value  in  use;  but 
a  very  great  quantity  of  other  goods  may  frequently 
be  had  m  exchange  for  it. 

Note.— The  development  of  the  monetaiy  system 
^  the  Umted  States  is  treated  at  length  in  Chapter 


Questions  for  Review,  Chapter  I. 

1.  What  is  the  true  function  of  money  and  how  early 
in  history  was  it  understood? 

2.  What  were  the  earliest  mediums  of  exchange? 

3.  What  is  the  reason  for  the  use  of  metal  as  money? 

4.  What  was  the  nature  of  the  first  stamped  metals? 

5.  Who  first  coined  money  under  the  Romans? 

6.  What  was  the  origin  of  the  English  pound  sterling? 

7.  Has  the  proportion  between  the  pound,  the  shilling 
and  the  penny  always  been  uniform?  How  about  the  nro 
portionate  value  of  these  coins?  ^ 

8  What  causes  have  contributed  to  the  diminishment 
of  the  real  quantity  of  valuable  metal  contained  in  coTns  ? 


28  BANKING,  CREDIT  AND  FINANCE 

9.     What  two  different  meanings  are  attached  in  eco- 
nomics to  the  word  "value"? 

10.  Show  how  many  things  which  have  the  greatest  value 
in  use  have  frequently  little  or  no  value  in  exchange,  and 
vice  versa. 

11.  What  effect  did  the  division  of  labor  have  upon  the 
early  system  of  barter  and  exchange? 

12.  Give  an  instance  of  the  use  of  money  as  a  measure  of 
value,  besides  being  a  medium  of  exchange. 

13.  In  what  way  does  money  function  as  a  standard  of 
value? 


CHAPTER  II 

Banks  and  Their  Uses 

Section  16.  Four  Branches  of  Business. — There 
are  four  principal  branches  or  functions  of  the  busi- 
ness of  modern  banking;  namely,  (1)  the  exchanging 
of  money;  (2)  the  lending  of  money;  (3)  the  borrow- 
ing of  money;  (4)  the  transmitting  of  money.  It 
is  in  this  order  that  the  various  functions  seem  to 
have  originated  in  most  countries;  but  almost  down 
to  the  period  of  the  American  Revolution  there 
was  little  popular  understanding  of  the  true  function 
of  banks  and  considerable  mystery  surrounded  the 
operations  of  those  who  were  commonly  called 
bankers. 

§  17.  "What  Is  a  Banker? »»— This  indefinite 
public  knowledge,  or  lack  of  knowledge,  was  evi- 
denced as  late  in  history  as  the  year  1746,  when  a 
British  statesman,  speaking  in  the  House  of  Com- 
mons, inquired:  ''What  is  it  that  we  call  a  Banker? 
There  is  in  this  city  of  London  a  company  or  corpor- 
ation, called  Goldsmiths,  and  most  of  those  called 
bankers  are  of  that  corporation;  but  so  far  as  I  know, 
there  is  not  a  company  or  corporation  in  England 
called  Bankers,  nor  has  the  business  any  definition 
or  description  either  by  common  law  or  by  statute. 

29 


30  BANKING,  CREDIT  AND  FINANCE 

By  custom  we  call  a  man  a  banker  who  has  an  open 
shop,  with  proper  counters,  servants,  and  books,  for 
receiving  other  people's  money,  in  order  to  keep  it 
safe,  and  return  it  upon  demand;  and  when  any  man 
has  opened  such  a  shop  we  call  him  a  banker,  without 
inquiring  whether  any  man  has  given  him  any  money 
to  keep  or  no;  for  this  is  a  trade  where  no  apprentice- 
ship is  required,  it  having  never  yet  been  supposed 
that  a  man  who  sets  up  the  trade  of  banking  could 
be  sued  upon  the  statute  of  Queen  Elizabeth  which 
enacts,  that  none  shall  use  any  art  or  mystery  then 
used,  but  such  as  have  served  an  apprenticeship  in 
the  same."  (See  Appendix— *' History  of  Banking.") 

§  18.  A  Dealer  in  Money.— In  the  present  day, 
the  functions  of  banks  are  better  understood.  A 
broad  view  of  them,  from  an  international  stand- 
point, is  as  follows: 

A  banker  is  a  dealer  in  capital,  or  more  properly 
a  dealer  in  money.  He  is  an  intermediate  party 
between  the  borrower  and  the  lender.  He  borrows 
of  one  party,  and  lends  to  another;  and  the  difference 
between  the  terms  at  which  he  borrows  and  those 
at  which  he  lends,  forms  the  source  of  his  profit.  By 
this  means  he  draws  into  active  operation  those 
small  sums  of  money  which  were  previously  un- 
productive in  the  hands  of  private  individuals;  and 
at  the  same  time  furnishes  accommodation  to  those 
who  have  need  of  additional  capital  to  carry  on  their 
commercial  transactions. 

§  19.  Private  and  Public  Banks.— Banks  have 
been  broadly  divided  into  private  and  public  banks. 
A  private  bank  is  that  in  which  there  is  but  one 


BANKS  AND  THEIR  USES  31 

proprietor  or  a  few  partners,  and  these  attend  per- 
sonally to  its  management.  A  public  bank  is  that  in 
which  there  are  numerous  partners  or  shareholders, 
and  they  elect  from  their  own  body  a  certain  number, 
who  are  intrusted  with  its  management. 

The  business  of  banking  consists  chiefly  in  receiv- 
ing deposits  of  money,  upon  which  interest  may  or 
may  not  be  allowed;  in  making  advances  of  money, 
principally  in  the  way  of  discounting  notes  and  bills; 
and  in  effecting  the  transmission  of  money  from  one 
place  to  another.  Banks  in  metropolitan  cities  are 
usually  the  agents  of  the  banks  in  smaller  commu- 
nities and  charge  a  commission  on  their  transactions. 

§'  20.  Disposable  Means  of  a  Bank. — The  dispos- 
able means  of  a  banlv  consist  of — First,  the  capital 
paid  in  by  the  partners,  or  shareholders.  Second, 
the  amount  of  money  deposited  by  their  customers. 
Third,  the  amount  of  notes  they  are  able  to  keep  out 
in  circulation.  Fourth,  the  amount  of  money  in  the 
course  of  transmission — that  is,  money  they  have  re- 
ceived, and  are  to  repay,  in  some  distant  place,  at  a 
future  time. 

These  disposable  means  are  employed — First,  in 
discounting  notes  and  bills.  Second,  in  advances  of 
money  in  the  form  of  cash  credits,  loans,  or  over- 
drawn accounts.  Third,  in  the  purchase  of  govern- 
ment, or  other  securities.  Fourth,  a  part  is  kept  in 
the  banker's  till,  to  meet  the  current  demands. 

Of  these  four  ways  of  employing  the  capital  of  a 
bank,  three  are  productive,  and  one  is  improductive. 
The  discounting  of  notes  and  bills  yields  interest; 
the  loans,  and  the  cash  credits,  and  the  overdrawn 


32  BANKING,  CREDIT  AND  FINANCE 

accounts,  yield  interest;  the  government  securities 
yield  interest;  the  money  in  the  till  yields  no  interest. 

The  expenses  of  a  bank  may  be  classified  thus: 
Rent,  taxes,  and  repairs  of  the  building  or  premiseis 
in  which  the  business  is  carried  on;  salaries  of  the 
officers;  stationers'  bills  for  books,  paper,  checks, 
notes,  stamps,  etc.;  incidental  expenses,  as  postage, 
light,  heat,  etc. 

The  profits  of  a  bank  are  that  portion  of  its  total 
receipts — including  discount,  interest,  dividends  and 
commission — which  exceeds  the  amount  of  the  ex- 
penses. 

§  21.     Banks    as    Commercial    Institutions. — In 

commercial  language  a  bank  is  a  repository,  or  an 
establishment,  for  the  purpose  of  receiving  the  money 
of  individuals;  either  to  keep  it  in  security,  or  to  im- 
prove it  by  trafficking  in  goods,  bullion,  or  bills  of 
exchange ;  and,  as  stated  above,  it  may  be  either  of  a 
public  or  of  a  private  nature.  A  public  bank  is  gen- 
erally regulated  by  certain  laws,  enacted  by  the 
goveiTiment  of  the  nation  or  state,  which  constitute 
its  charter,  limit  its  capital,  and  establish  the  rules 
by  which  it  is  to  conduct  business.  A  private  bank, 
on  the  other  hand,  is  merely  a  contract  among  indi- 
viduals, for  carrying  on  a  trade  in  money,  notes  and 
bills;  and  the  responsibility  of  the  proprietor  or 
partner  is  usually  the  only  security  of  those  who 
transact  business  with  it. 

Banks  then  are  properly  commercial  institutions 
which  by  affording  credits,  or  issuing  notes,  as  the 
representative  of  money,  enable  merchants,  with 
greater  facility,  to  buy  and  sell  commodities,  at  home 


BANKS  AND  THEIR  USES  33 

or  abroad.  The  produce  of  one  country  is  thus  ex- 
changed with  that  of  another,  by  means  of  a  medium 
to  which  an  ideal  value  is  attached;  hence  the  great 
utility  of  banking  establishments  in  all  connnercial 
countries. 

§'  22.  Classification  of  Banks. — Private  bankinsf 
is  the  oldest  form  of  the  banking  business  and,  as  is 
well  known,  the  antiquity  of  banks  is  very  great. 
Records  exist  of  banking  transactions  among  the 
Assyrians  and  in  the  Metropolitan  Museum  in  New 
York  there  are  Babylonian  tablets  bearmg  distinct 
records  of  transactions  in  banking  that  took  place  in 
the  reign  of  Nebuchadnezzar. 

Public  or  incorporated  banks  may  be  broadly 
classified  as  national  and  state  banks.  National 
banks  exist  by  virtue  of  national  laws.  State  banks 
are  governed  by  the  acts  of  state  legislatures. 

State  banks  may  be  further  divided  into  banks  of 
discount  and  deposit,  savings  banks,  and  trust  com- 
panies. It  may  also  be  noted  that  state  banks  may 
exist  (a)  by  virtue  of  special  acts  or  charters,  or, 
(b)  by  virtue  of  general  laws  under  which  all  such 
banks  acquire  the  same  rights  and  liabilities. 

The  establishment  of  state  banks  under  special 
legislative  charter  was  the  original  method  em- 
ployed, but  the  disadvantages  of  the  charter  system 
are  obvious.  The  charters  were  costly  to  the  pro- 
moters, they  could  be  granted  only  when  the  legis- 
lature was  in  session,  and  they  opened  the  door  to 
corruption  on  the  one  hand  and  to  the  gTanting  of 
special  privileges  on  the  other. 


34  BANKING,  CREDIT  AND  FINANCE 

The  enactment  of  general  laws  to  govern  the  estab- 
lishment of  banldng  institutions  was  made  necessary 
by  the  evils  attending  the  special  charter  system. 
Every  state  now  has  a  general  banking  law,  provid- 
ing an  inexpensive  and  ready  means  of  obtaining 
authority  to  establish  a  bank  under  state  regulations. 
Charters,  however,  are  still  granted  by  some  state 
legislatures,  and  there  are  a  number  of  state  banks 
still  running  under  old  charters. 

§  23^  National  Banks. — ^National  banks  of  the 
United  States  are  established  under  the  National 
Banking  Act  and  are  subject  to  federal  regulation. 
National  banks  in  other  countries  have  certain  re- 
lations with  their  respective  governments,  and  a 
bank  of  this  character  has  been  twice  established  in 
the  history  of  the  United  States.  In  each  case,  the 
national  government  founded  and  conducted  such  a 
bank  with  branches.  This  bank,  with  its  two  periods 
of  existence,  was  known  as  the  Bank  of  the  United 
States.  The  idea  of  it  was  conceived  immediately 
after  the  adoption  of  the  Constitution,  by  Alexander 
Hamilton,  then  Secretary  of  the  Treasury,  and  the 
act  of  Congress  incorporating  the  first  bank  became 
law  on  February  25,  1791.  The  duration  of  the  bank 
was  limited  to  the  4th  of  March,  1811. 

The  second  Bank  of  the  United  States,  located  at 
Philadelphia  with  branches  in  the  several  states,  was 
created  by  an  act  of  Congress  March  3, 1816,  and  was 
conducted  until  1836,  when  a  renewal  of  its  charter 
was  denied.  In  consequence  of  this,  reorganization 
was  effected  by  means  of  authority  of  the  legislature 
of  the  State  of  Pennsylvania.  The  bank  assigned  in 
1841,  its  affairs  being  finally  liquidated  in  1856  and 


BANKS  AND  THEIR  USES  35 

resulting  in  the  payment  in  full  of  interest  and  prin- 
cipal of  liabilities  to  depositors  and  note  holders; 
the  shareholders,  however,  received  nothing  on  their 
investment  in  stock  of  the  bank. 

During  President  Tyler's  administration,  effoi-ts 
were  made  to  establish  another  national  bank  to  be 
conducted  by  the  United  States  government,  but 
the  president  vetoed  the  bill  and  no  similar  bank  was 
ever  re-established. 

The  first  bank  in  the  United  States  was  the  Bank 
of  North  America,  elsewhere  referred  to  (see  Appen- 
dix,) by  which  exclusive  privileges  of  a  monopolistic 
character  were  sought,  and  these  were  soon  proven 
to  be  inconsistent  with  the  general  character  of  an 
American  institution.  It  was  opened  for  business  on 
January  1, 1782. 

The  National  banks  in  the  United  States,  and 
many  of  the  state  banks,  are  now  operated  in  con- 
nection with  the  Federal  Reserve  system.  See  Chap- 
ter IX. 

§  24  Banks  of  Discount  and  Deposit. — A  bank  of 
discount  is  owned  by  the  shareholders  who  contribute 
the  capital.  It  receives  conmiercial  and  other  de- 
posits, usually  payable  on  demand.  It  discounts 
commercial  paper,  makes  short  loans  for  commercial 
purposes,  and  is  managed  by  a  board  of  directors 
chosen  by  the  shareholders,  who  hold  annual  meet- 
ings to  receive  reports  and  elect  dii'ectors. 

A  very  important  provision  of  the  National  Bank 
Act  is  as  follows:  "No  bank  shall  loan  or  discoimt  on 
the  security  of  shares  in  its  own  capital  stock  unless 
such  security  or  purchase  shall  be  necessary  to  pre- 


36  BANKING,  CREDIT  AND  FINANCE 

vent  loss  upon  a  debt  previously  contracted  in  good 
faith." 

§  25.  Savings  Banks. — Savings  banks  are  organ- 
ized by  trustees  and  operate  usually  without  a  capital 
stock,  having  no  shareholders.  The  deposits  are  re- 
ceived chiefly  in  small  sums,  and  are  payable  only 
after  notification  by  the  depositors  that  they  wish  to 
withdraw  part  or  all  of  their  money.  In  the  case  of 
small  withdrawals,  the  notification  is  usually  waived, 
except  in  periods  of  financial  stringency  or  depres- 
sion. Loans  of  the  deposit  funds  are  made  for  longer 
periods  as  a  rule  than  in  the  case  of  banks  of  discount, 
and  are  made  to  investors,  for  building  purposes,  etc. 
The  trustees  elect  some  of  their  number  as  directors 
and  these  directors  manage  the  business.  If  a  trustee 
resigns  or  dies,  a  successor  is  elected  by  the  other 
trustees.  The  depositors  have  no  voice  in  the  elec- 
tion of  officers  or  in  the  management  of  the  business. 

The  United  States  government  also  operates  a 
savings  bank  in  connection  with  the  Post  Office. 

§  26.  Trust  Companies. — Trust  companies  are  a 
modem  development  of  the  banking  business.  They 
combine  many  of  the  functions  of  the  older  banks  of 
discount  with  the  execution  of  trusts.  Deposits  are 
received  by  them  and  interest  paid.  The  making  of 
loans  fonns  an  important  part  of  the  business.  The 
funds  are  lent  in  all  cases  on  collateral  security, 
stocks,  bonds,  etc.,  and  not,  as  in  the  case  of  commer- 
cial banks,  on  the  credit  of  business  men  and  firms. 

Trust  companies  act  as  administrators  and  exec- 
utors of  estates,  guardians  to  minors,  trustees  for 
beneficiaries  of  wills,  etc.   They  are  often  called  upon 


BANKS  AND  THEIR  USES  37 

also  to  aet  as  trustees  of  bondholders  in  large  opera- 
tions, such  as  the  building  or  reorganizing  of  rail- 
roads. 

One  of  their  principal  functions  is  the  manage- 
ment of  real  estate,  especially  where  the  ownership  is 
vested  in  estates  of  deceased  individuals  or  in  corpor- 
ations. They  act  as  fiduciary  agents  in  business 
operations  of  a  greatly  varied  character,  and  in  re- 
cent years  have  largely  replaced  individual  trustees 
in  the  management  of  estates,  etc.,  for  the  very  good 
reasons  that  they  possess  capital,  responsibility, 
experience,  disinterestedness  and  conservatism,  and 
besides  have  fixed  charges  of  a  reasonable  character 
for  the  services  they  render.  They  have  proved  a 
valuable  addition  to  the  modem  machinery  of  busi- 
ness. 

§  27.  Utility  of  Banks. — In  a  commercial  com- 
munity banks  possess  a  large  sphere  of  usefulness. 
Their  utility  has  been  well  described  as  sixfold: 
First,  they  furnish  a  safe  repository  for  money;  sec- 
ond, they  encourage  thrift  by  the  payment  of  interest 
on  deposits;  third,  they  render  useful  service  to  all  en- 
gaged in  production,  transportation  and  exchange  of 
commodities;  fourth,  they  also  render  useful  service 
to  their  customers  by  furnishing  exchange  and 
otherwise  arranging  for  the  transmission  of  money; 
fifth,  the  check  system  affords  a  useful  record  of 
individual  expenditures;  sixth,  by  collecting  money 
in  a  large  aggregate,  they  render  it  more  eifective 
for  purposes  of  trade  and  enterprise. 

But  this  list  does  not  include  all  of  the  particulars 
in  which  banks  benefit  the  business  communitv.    As 


88  BANKING,  CREDIT  AND  FINANCE 

we  shall  presently  see,  they  afford  a  convenient  and 
valuable  means  for  the  interchange  of  infoi-mation 
affecting  credit;  they  are  useful  to  business  men  of 
probity  as  references;  they  keep  the  community 
supplied  with  convenient  "change;"  in  many  places 
they  afford  the  only  means  of  safe  deposit  for  valu- 
ables; and  last,  but  by  no  means  least,  they  exert 
a  tremendous  moral  force  in  behalf  of  honesty, 
truthfulness,  industry,  perseverance,  thrift,  prudence 
and  punctuality. 

§  28.  The  Safe-keeping  of  Money. — In  the  first 
place,  banks  are  useful  as  places  of  security  for  the 
deposit  of  money.  The  circumstances  which  gave 
rise  to  the  business  of  banking  in  England  was  a 
desire  on  the  part  of  the  merchants  of  London  to 
obtain  a  place  where  they  might  lodge  their  money 
in  security.  Everyone  who  has  had  the  care  of  large 
sums  of  money  knows  the  anxiety  which  attends  their 
custody.  A  person  in  this  case  must  either  take  care 
of  his  money  himself,  or  trust  it  to  his  employees. 
If  he  takes  care  of  it  himself,  he  will  often  be  put  to 
inconvenience,  and  will  have  to  deny  himself  holidays 
and  comforts,  of  which  a  man  who  is  possessed  of 
much  money  would  not  like  to  be  deprived.  If  he 
intrusts  it  to  others,  he  must  depend  upon  their 
honesty  and  their  ability.  And,  although  in  many 
important  cases  an  employer  is  compelled  to  do 
this,  yet  he  does  not  feel  the  same  satisfaction  as 
if  the  money  was  actually  under  his  own  care.  Some 
instances  of  neglect  c^r  of  dishonesty  will  neces- 
sarily occur,  and  these  will  occasion  suspicion  in 
reference  to  other  parties  against  whom  no  suspicion 
ought  to  be  entertained.   Besides,  in  both  these  cases, 


BANKS  AND  THEIR  USES  39 

the  money  is  lodged  in  insecure  premises,  and  is 
subject  to  thieves,  to  fire,  and  to  other  contingencies, 
against  which  it  is  not  always  easy  to  guard. 

All  these  evils  are  obviated  by  means  of  banking. 
The  owner  of  money  need  neither  take  the  charge  of 
it  himself,  nor  trust  to  his  dependents.  He  can  place 
it  in  the  hands  of  his  bankers.  They  are  responsible 
men  or  institutions  and  are  accountable  to  him  for 
the  amount.  If  they  are  robbed,  it  is  no  loss  to  him; 
they  are  pledged  to  restore  to  him  the  amount  of 
his  deposit  when  he  shall  require  it.  Whenever  he 
wants  money  he  has  only  to  write  an  order,  or  check, 
upon  his  banker,  and  the  person  to  whom  he  is  in- 
debted takes  the  check  to  the  bank,  and  without 
any  hesitation  or  delay  receives  the  money. 

§i  29.  The  Allowance  of  Interest. — Bankers  often 
allow  interest  for  money  placed  in  their  hands  on 
deposit.  This  is  a  direct  incentive  to  thrift, 
especially  in  the  case  of  depositors  in  savings  banks. 

By  means  of  banking,  the  various  small  sums  of 
money  which  would  have  remained  unproductive 
in  the  hands  of  individuals,  are  collected  into  large 
amoimts  in  the  hands  of  the  bankers,  who  employ  it 
in  granting  facilities  to  trade  and  commerce.  Thus 
banking  increases  the  productive  capital  of  the  na- 
tion. At  the  origin  of  banking,  "the  new-fashioned 
banker,"  as  they  were  called,  allowed  a  certain  rate 
of  interest  for  money  placed  in  their  hands.  The 
banks  of  Scotland  carry  this  practice  to  the  great- 
est extent,  as  they  receive  upon  interest  so  low  an 
amount  as  ten  pounds,  and  also  allow  interest  on 
the  balance  of  a  running  account.  Many  of  the 
country  bankers  in  England  allow  interest  on  the 


40  BANKING,  CREDIT  AND  FINANCE 

balance  of  a  miming  account,  and  charge  commis- 
sion on  the  amount  of  the  money  withdrawn.  The 
London  bankers  generally  do  not  allow  interest  on 
deposits,  but  neither  do  they  charge  commission.  All 
their  profits  are  derived  from  the  use  of  their  cus- 
tomer's money.  The  banks  of  Scotland  do  not  charge 
commission,  although  they  allow  interest  on  deposits; 
but  those  banks  have  a  profit  by  the  issue  of  their 
notes.  The  London  bankers  do  not  issue  notes. 
The  practice  of  paying  interest  on  general  deposits 
is  becoming  more  common  in  America. 

§  30.  The  Loaning  of  Money. — Another  benefit 
derived  from  bankers  is,  that  they  make  advances 
to  persons  who  want  to  borrow^  money.  These  ad- 
vances are  made  (a)  by  discounting  bills  or  notes; 
(b)  upon  personal  security;  (c)  upon  the  joint  se- 
curity of  the  borrower  and  two  or  three  of  his 
friends, — and  sometimes  (d)  upon  mortgage.  Per- 
sons engaged  in  trade  and  commerce  are  thus  enabled 
to  augment  their  capital,  and  consequently  their 
wealth.  The  increase  of  money  in  circulation  stimu- 
lates production. 

When  bankers  are  compelled  to  withhold  their 
usual  accommodation,  both  the  commercial  and  the 
agricultural  interests  may  be  plunged  into  extreme 
distress. 

The  great  advantage  arising  to  a  neighborhood 
from  the  establishment  of  a  bank,  is  derived  mainly 
from  the  additional  supplies  of  money  advanced  in 
the  fonn  of  loans,  or  discounts,  to  the  inhabitants 
of  the  place. 


BANKS  AND  THEIR  USES  41 

§  3X.  The  Transmission  of  Money. — Another 
benefit  derived  from  bankers  is,  that  they  transmit 
money  from  one  part  of  the  country  to  another. 

There  is  scarcely  a  person  in  business  who  has  not 
occasion  sometimes  to  send  money  to  a  distant  town. 
But  how  is  this  to  be  done  ?  He  cannot  send  a  mes- 
senger with  it  on  purpose — that  would  be  too  ex- 
pensive. He  cannot  send  it  by  mail — that  would  be 
too  hazardous.  How,  then,  is  the  money  to  be  sent  1 
He  can  either  mail  a  check  on  his  own  bank,  which 
can  be  cashed  or  deposited  for  credit  in  the  distant 
town  or  he  can  **buy  exchange''  on  New  York  or 
Chicago  and  mail  the  bank  draft.  In  either  case  the 
banks  concerned  effect  the  transfer  of  the  required 
funds,  without  risk  to  the  person  accommodated. 

§  32.  Exchange  of  Currency. — ^Wherever  a  bank 
is  established,  the  public  is  able  to  obtain  that  de- 
nomination of  cuiTency  which  is  best  adapted  for 
carrying  on  the  commercial  operations  of  the  place. 
In  a  tow^n  which  has  no  bank,  a  person  may  have 
occasion  to  use  small  notes,  and  have  none  but  large 
notes,  and  at  other  times  he  may  have  need  of  large 
notes,  and  not  be  able  to  obtain  them.  But  where  a 
bank  is  established  there  can  be  no  difficulty  of  this 
kind.  The  banks  issue  that  description  of  notes 
which  the  receivers  may  require,  and  are  always 
ready  to  exchange  them  for  others  of  a  different 
denomination. 

Banks,  too,  usually  supply  their  customers  and 
the  neighborhood  with  gold  and  silver  coinage  as 
required;  and  if,  on  the  other  hand,  silver  or  gold 
should  be  too  abundant,  the  banks  will  receive  it, 
either  as  a  deposit,  or  in  exchange  for  their  notes. 


42  BANKING,  CREDIT  AND  FINANCE 

Hence,  where  banks  are  established,  it  is  easy  to  ob- 
tain change.  This  is  very  convenient  to  those  who 
have  to  pay  large  sums  in  wages,  or  who  purchase 
in  small  amounts  the  commodities  in  which  they 
trade. 

§  33.  An  Economy  of  Time. — By  means  of  bank- 
ing there  is  a  great  saving  of  time  in  making  money 
transactions.  It  takes  much  longer  time  to  count 
out  a  sum  of  money,  especially  in  various  European 
currencies,  than  it  does  to  write  a  check.  And  it 
is  much  less  trouble  to  receive  a  check  in  payment 
of  a  debt  and  then  to  pay  it  into  the  bank,  than  it  is 
to  receive  and  handle  a  sum  of  money  in  currency. 
What  inconveniences  would  arise  from  the  neces- 
sity of  weighing  gold  coins  in  some  countries !  What 
a  loss  of  time  from  disputes  as  to  the  goodness  or 
badness  of  particular  pieces  of  money  I 

Besides  the  loss  of  time  that  must  necessarily 
occur  on  every  transaction,  we  must  also  reckon  the 
loss  which  every  merchant  or  tradesman,  in  an  ex- 
tensive line  of  business,  might  and  in  many  coun- 
tries would  certainly  sustain  in  the  course  of  a  year 
from  receiving  counterfeit  or  deficient  coin  or  it 
may  be,  spurious  notes.  From  all  this  risk  he  is 
exempt  by  having  a  banker.  If  he  receives  payment 
of  a  debt,  it  is  in  the  form  of  a  check  upon  his  cus- 
tomer's banker.  He  pays  it  into  his  own  bank,  and 
no  coin  or  bank  notes  pass  through  his  hands.  If 
he  makes  drafts,  those  drafts  are  presented  by  his 
banker:  and  if  his  banker  takes  bad  money,  it  is 
his  own  loss. 

§•  34.  Collection  of  Drafts. — A  business  man  who 
has  a  banker  saves  the  trouble  and  expense  of  pre- 


BANKS  AND  THEIR  USES  43 

senting  those  bills  or  drafts  which  he  may  draw  upon 
his  customers,  or  which  he  may  receive  in  exchange 
for  his  goods.  He  pays  these  into  the  hands  of  his 
banker,  and  has  no  further  trouble.  He  has  no 
care  about  the  custody  of  his  bills  receivable — no 
anxiety  about  being  stolen — no  danger  of  forgetting 
them  imtil  they  are  overdue,  and  thus  exonerating 
the  indorsers — no  trouble  of  sending  to  a  distance  in 
order  to  demand  payment.  He  has  nothing  more  to 
do  than  to  see  the  amount  entered  to  his  credit  in  his 
banker's  books.  If  a  di'aft  or  note  be  not  paid,  it 
is  brought  back  to  him  on  the  day  after  it  falls  due, 
properly  noted.  The  banker's  clerk  and  the  no- 
tary 's  clerk  are  witnesses  ready  to  come  forward  to 
prove  that  it  has  been  duly  presented,  and  the  no- 
tary's ticket  attached  to  it  assigns  the  reason  why 
it  is  not  paid.  This  circumstance  alone  may  cause 
an  immense  saving  of  expense  to  a  mercantile  house 
in  the  course  of  a  year. 

Doing  business  through  a  banker  also  prevents 
loss  from  various  kinds  of  mistakes  that  may  be 
made  by  the  employees  of  a  business  house.  In  a 
banking-house  mistakes  are  not  so  likely  to  occur, 
though  they  do  occur,  sometimes;  but  the  loss  falls 
upon  the  banker,  and  not  upon  his  customer. 

§  35.  The  Banker  as  a  Reference. — Still  another 
advantage  of  having  a  banker  is,  that  by  this  means 
the  business  man  has  a  continual  reference  as  to  his 
respectability.  If  the  banker  is  applied  to  through 
the  proper  channel,  he  gives  his  testimony  as  to  the 
respectability  of  the  customer.  This  may  be  an  im- 
mense advantage  to  a  man  in  business,  as  a  means 


44  BANKING,  CREDIT  AND  FINANCE 

of  increasing  his  credit;  and  credit,  as  Benjamin 
Franklin  said,  is  money. 

The  keeping  of  an  account  with  a  bank  enables  a 
merchant  not  only  to  give  a  constant  reference  as  to 
his  own  respectability,  but  it  also  enables  him  to  as- 
certain the  respectability  of  other  persons  who  deal 
with  bankers.  There  are  numerous  cases  in  which 
a  merchant  may  wish  to  know  this,  especially  where 
such  facilities  as  the  commercial  agency  repOji'ts, 
with  which  every  American  business  man  is  famil- 
iar, are  lacking. 

Among  nearly  all  bankers,  says  Gilbart,  *'the 
practice  is  established  of  giving  information  to  each 
other  as  to  the  respectability  of  their  customers. 
For  as  the  bankers  themselves  are  the  greatest  dis- 
counters of  bills,  it  is  their  interest  to  follow  this 
practice;  and  indeed  the  interest  of  their  customers 
also,  of  those  at  least  who  are  respectable.'* 

§  36.  A  Record  of  Expenditures. — By  means  of 
banking,  people  are  able  to  preserve  an  authentic 
record  of  their  annual  expenditure.  If  a  person 
pays  in  to  his  banker  all  the  money  he  receives  in  the 
course  of  a  year,  and  makes  all  his  payments  by 
checks — then  by  looking  over  his  bank  account  and 
check-book  at  the  end  of  the  year  he  will  readily 
see  the  total  amount  of  his  receipts,  and  the  various 
items  of  his  expenditure. 

"This  is  very  useful  to  those  who  have  not  ac- 
quired habits  of  business,  and  who  may  therefore 
be  in  danger  of  living  beyond  their  means.  It  is 
useless  to  advise  such  persons  to  keep  an  account  of 
their  expenses — they  will   do  no   such  thing;  but 


BANKS  AND  THEIR  USES  45 

when  short  of  money  at  Christmas  to  pay  their  bills, 
they  may  take  the  trouble  of  looldng  over  their 
check-book,  and  noticing  how  many  checks  w^ere 
draw^n  for  the  purchase  of  unnecessary  ai-ticles.'^ 

A  bank  account  is  useful  also  in  case  of  disputed 
payments.  People  do  not  always  take  receipts  for 
money  they  pay,  and  when  they  do  the  receipts  may 
be  lost  or  mislaid.  In  case  of  death,  or  of  omission  to 
enter  the  amount  in  the  creditor's  books,  the 
money  may  be  demanded  again.  Should  the  pay- 
ment have  been  made  in  currency,  the  payer  can 
offer  no  legal  proof  of  having  settled  the  accoimt; 
but  if  the  account  w^as  discharged  by  a  check  on  a 
banker,  the  check  itself  can  be  produced,  and  the 
payment  proved  by  the  officers  of  the  bank,  who  can 
be  subpoenaed  for  that  purpose. 

§  37.  Safe  Deposit  for  Valuables. — Another  ad- 
vantage resulting  from  a  banker  in  many  places  that 
lack  safe  deposit  vaults  is,  the  customer  has  a  secure 
place  of  deposit  for  any  deeds,  papers,  or  other  prop- 
erty that  may  require  peculiar  care.  If  a  person 
W' ere  going  to  the  country  he  might  send  his  plate  or 
jewelry  to  his  banker,  who  will  lock  it  up  in  his  vault 
and  thus  it  will  be  preserved  from  fire  and  thieves 
until  his  return.  European  law^yers,  stockbrokers, 
and  others,  who  have  deeds,  securities  or  other  doc- 
uments of  importance  left  in  their  custody,  can  send 
them  to  the  bank  for  the  night,  and  thus  avoid  the 
danger  of  fire.  In  America,  safety  deposit  vaults 
are  now^  found  in  every  city  of  importance,  often 
operated  in  connection  with  banks.  In  the  smaller 
cities,  tow^ns  and  villages,  the  banker  is  a  universal 
custodian  of  valuables  for  his  depositors. 


46  BANKING,  CREDIT  AND  FINANCE 

§  38.  Valuable  Help  in  Business. — By  having  a 
banker,  people  have  a  ready  channel  of  obtaining 
much  information  that  will  be  useful  to  them  in  the 
way  of  their  business.  They  will  leam  the  way  in 
which  bankers  keep  their  accounts;  and  may  learn 
many  of  the  laws  and  customs  relating  to  negoti- 
able paper.  If  they  have  to  buy  or  sell  bonds, 
stocks,  or  shares  the  banker  can  send  them  to  a  re- 
spectable broker,  who  can  manage  the  business;  or 
should  they  be  about  to  travel,  and  wish  to  know  the 
best  way  of  receiving  money  abroad;  or  be  appoint- 
ed executors  to  a  will,  and  have  to  settle  money 
matters — the  banker  will  in  these  and  many  other 
cases,  be  able  to  give  them  the  necessary  informa- 
tion. 

§  39.  A  Moral  Influence  for  Good. — Banking 
also  exercises  a  powerful  influence  upon  the  morals 
of  society.  It  tends  to  produce  honesty  and  punc- 
tuality in  pecuniary  engagements.  Bankers,  for 
their  own  interest,  always  have  a  regard  to  the 
moral  character  of  the  party  with  whom  they  deal: 
they  inquire  whether  he  be  honest  or  tricky,  industri- 
ous or  idle,  prudent  or  speculative,  thrifty  or  extrav- 
agant, and  they  will  more  readily  make  advances 
to  a  man  of  moderate  property  and  good  morals  than 
to  a  man  of  large  property  but  of  inferior  reputation, 

Thus  the  establishment  of  a  bank  in  any  place  im- 
mediately advances  the  pecuniary  value  of  a  good 
moral  character.  There  are  numerous  instances  of 
persons  having  risen  from  obscurity  to  wealth  only 
by  means  of  their  moral  character,  and  the  confidence 
which  that  character  produced  in  the  mind  of  their 
banker.    It  is  not  merely  by  way  of  loan  or  discount 


BANKS  AND  THEIR  USES  47 

that  a  banker  serves  such  a  person.  He  also  speaks 
well  of  him  to  those  persons  who  may  make  inquiries 
respecting  him  and  the  banker's  good  opinion  will 
be  the  means  of  procuring  him  a  higher  degree  of 
credit  with  the  parties  with  whom  he  trades. 

These  effects  are  easily  perceivable  in  country 
towns;  and  even  in  great  cities,  if  a  house  be  known 
to  have  engaged  in  speculative  transactions,  or  in 
any  other  way  to  have  acted  questionably,  their  pa- 
per will  be  taken  by  the  banlvers  less  rapidly  than 
that  of  a  strictly  reputable  house  of  smaller  size. 

It  is  thus  that  bankers  perform  the  functions  of 
public  conservators  of  the  commercial  virtues.  From 
motives  of  private  interest  they  encourage  the  in- 
dustrious, the  prudent,  the  punctual,  and  the  honest 
— while  they  discountenance  the  spendthrift  and  the 
gambler,  the  liar  and  the  knave.  They  hold  out 
inducements  to  uprightness,  which  are  not  disre- 
garded by  even  the  most  abandoned.  There  is  many 
a  man,  says  Gilbart  truly,  who  would  be  deterred 
from  dishonesty  by  the  frown  of  a  banker,  though 
he  might  care  but  little  for  the  admonitions  of  a 
bishop. 


Questions  for  Review,  Chapter  11, 

1.  What  are  the  four  principal  functions  of  a  modern 
bank? 

2.  Into  what  classes  are  banks  divided? 

3.  What  are  the  principal  features  of  the  business  of 
banking? 

4-     What  funds  constitute  the  disposable  means  of  a 
bank? 

5.     How  are  these  disposable  means  employed? 


48  BANKING,  CREDIT  AND  FINANCE 

6.  How  may  the  expenses  of  a  bank  be  classified? 

7.  How  are  the  profits  of  a  bank  reckoned? 

8.  Give  a  definition  of  a  bank  in  commercial  language. 

9.  How  is  a  public  bank  generally  regulated? 

10.  What  is  the  nature  of  a  private  bank? 

11.  What  is  the  security  of  those  who  transact  business 
with  a  private  bank? 

12.  What  features  constitute  the  great  utility  of  banking 
establishments  in  commercial  countries? 

13.  Wliat  was  the  first  consideration  that  gave  rise  to 
the  business  of  banking? 

14.  What  evils  are  obviated  by  means  of  banking? 

15.  In  what  way  does  banking  increase  the  productive 
capital  of  a  nation? 

16.  "What  advantages  are  secured  to  persons  engaged  in 
trade  and  commerce,  by  means  of  banking? 

17.  How  does  the  institution  of  banking  facilitate  the 
transmission  of  money? 

18.  In  what  way  does  banking  save  the  time  and  expense 
of  a  merchant  or  retail  tradesman? 

19.  How  do  banks  aid  business  men  by  acting  as  refer- 
ences for  them? 

20.  Show  how  the  system  of  paying  by  means  of  checks 
enables  one  to  preserve  a  record  of  expenditures. 

21.  What  eflTect  has  banking  upon  the  morals  of  society? 

22.  How  do  banks  aid  business  by  the  dissemination  of 
useful  information? 


CHAPTER  III 

Methods  of  Banking 

Section  40.  Facilities  for  Commerce. — Banks 
are  absolutely  necessary  to  the  success  of  modern 
commercial  enterprises.  They  provide  a  place  for  the 
safe-keeping  of  money  and  securities,  as  we  have 
seen,  and  make  the  payment  of  bills  much  more  con- 
venient than  if  currency  instead  of  checks  were  the 
more  largely  used.  But  the  great  advantage  of  a 
banking  institution  to  a  business  man  is  the  oppor- 
tunity it  affords  him  of  borrowing  money,  of  securing 
the  cash  for  the  caiTying  on  of  his  business,  while 
his  own  capital  is  locked  up  in  merchandise  or  in 
the  hands  of  his  debtors.  Another  and  important 
advantage  is  to  be  found  in  the  facilities  afforded  by 
banks  for  the  collection  of  checks,  notes,  and  drafts. 

The  legal  medium  of  exchange  of  a  country  is 
called  its  currency,  that  which  passes  current,  or 
circulates  as  money,  such  as  coin  and  bills.  Bullion 
is  uncoined  gold  or  silver.  More  than  ninety  per  cent 
of  the  cash  circulation  of  the  country  is  represented 
by  checks,  etc.,  and  not  by  actual  money.  It  is  the 
banks  of  the  country  that  make  the  convenient  check 
system  possible. 

g  41.  Organization  of  Banks. — The  national 
banks  are  organized  under  national  laws  while  state 

49 


50  BANKING,  CREDIT  AND  FINANCE 

banks,  savings  banks,  etc.,  are  organized  under  the 
laws  of  the  State  in  which  they  are  located. 

Any  person  who  has  money  and  credit  can  start 
a  private  bank.  Some  of  the  largest  banking  institu- 
tions of  the  world  are  owned  by  private  individuals, 
and  are  not  subject  to  law  any  more  than  is  any  other 
kind  of  business  concern. 

By  an  act  of  Congress  of  1864  the  corporate  life 
of  a  national  banking  association  was  fixed  at  twenty 
years.  Under  date  of  July  12, 1882,  an  act  was  passed 
authorizing  extensions  for  an  additional  period  of 
twenty  years  and  second  extensions  were  author- 
ized by  an  Act  of  April  12,  1902. 

§  42.  National  Banks. — Section  5133  of  the  Re- 
vised Statutes,  formerly  Section  5  of  the  act  of  June 
3,  1864,  provides  for  the  organization  of  national 
banking  associations  by  any  number  of  natural  per- 
sons not  less  thanfive.  The  law  confers  authority  upon 
the  Comptroller  of  the  Currency  to  approve  the  cor- 
porate title  of  an  association  and  also  to  withhold 
his  certificate  authorizing  an  association  to  begin 
business  when,  as  the  result  of  special  examination 
or  otherwise,  it  is  ascertained  that  the  association 
has  been  organized  for  purposes  other  than  those 
contemplated  by  the  act.  It  is  further  provided 
that  no  banks  shall  be  organized  with  capital  less 
than  $100,000  unless  sanctioned  by  the  Secretary  of 
the  Treasury.  This  was  reduced  to  $25,000  in  cer- 
tain cases,  in  1900, 

To  avoid  formation  of  associations  for  ulterior 
purposes  or  by  those  lacking  the  qualifications  neces- 
sary to  successful  conduct  of  the  banking  business, 


METHODS  OF  BANKING  51 

or  in  a  place  the  population  and  business  of  which 
are  insufficient  to  warrant  the  establishment  of  a 
national  bank,  the  Comptroller,  upon  receipt  of  an 
application  to  organize,  causes  a  special  investiga- 
tion to  be  made,  the  results  of  which  determine  the 
favorable  or  unfavorable  action. 

The  expansion  of  the  national  banking  system 
along  noi-mal,  safe,  and  conservative  lines  is  unques- 
tionably desirable,  but  the  Comptroller  of  the  Cur- 
rency takes  the  view  that  the  organization  of  a  bank 
is  not  warranted  in  a  community  where  there  is  no 
reason  for  its  existence;  that  is,  where  sufficient 
business  would  not  naturally  come  to  warrant  suc- 
cess, or  where  the  board  of  directors  will  not  be  com- 
posed of  men  of  business  ability  equal  to  the  best  to 
be  found  in  the  community,  or  where  the  organiza- 
tion is  attempted  by  promoters  who,  by  public  and 
private  means,  create  a  false  impression  that  a  banK: 
is  needed  and  that  success  is  assured  by  merely  ob- 
taining subscriptions  to  the  capital  stock.  Compara- 
tively few  applications  for  authority  to  organize 
national  banks  are  rejected,  however. 

See  chapter  IX  on  the  operation  of  the  Federal 
Reserve  System. 

The  number  of  national  banks  reporting  to  the 
Comptroller  of  the  Currency  in  1919  was  7,762,  with 
a  total  capital  of  $1,115,507,000  and  total  surplus  of 
$869,457,000.  The  net  earnings  of  these  banks  in 
that  year  were  $299,980,000. 

§'  43.  State  Banks. — National  banks  are  the  only 
banks  of  issue  in  the  United  States.  But  the  States 
have  chartered  several  forms  of  deposit  banks  in 


52  BANKING,  CREDIT  AND  FINANCE 

large  numbers  while  private  bankers  are  also  nu- 
merous. 

The  business  operations  of  State  banks  differ  from 
those  of  national  banking  associations  only  in  so 
far  as  they  lack  the  feature  of  note  issue.  It  is  an 
advantage  to  State  banks  and  trust  companies  to 
become  members  of  the  Federal  Reserve  system, 
which  w^as  organized  to  meet  the  need  of  commerce 
in  peace,  and  proved  equal  to  the  enormous  burden 
forced  upon  it  by  the  World  War.  Through  member- 
ship in  this  nation-wide  system  a  State  bank  or  trust 
company  safeguards  the  interests  of  its  depositors 
and  stockholders  more  fully  than  when  operating 
as  a  non-member  bank,  not  only  as  to  the  repayment 
of  deposits,  but  also  as  to  its  ability  to  supply  legiti- 
mate demands  for  loans. 

The  total  number  of  State  banks  and  trust  com- 
panies in  the  United  States  approximates  22,000. 
The  combined  resources  of  all  the  29,135  banks 
(including  national,  state,  and  federal  reserve  banks) 
reporting  in  1919  aggregated  over  fifty-two  billions 
of  dollars. 

§  44.  The  Name  ''Bank." — In  some  of  the  states 
the  title  Bank  can  be  lawfully  used  by  anyone;  in 
other  states,  for  instance.  New  York  and  Massa- 
chusetts, the  title  Bank  can  be  used  only  by  duly 
incorporated  banks  which  are  organized  and  con- 
ducted under  the  provisions  and  restrictions  of  the 
national  or  state  banking  laws. 

§  45.  Officers  of  a  Bank. — Banking  associations 
are  organized  for  business,  generally  speaking,  very 
much  like  any  other  incorporation.   The  stockholders 


METHODS  OF  BANKING  53 

elect  a  board  of  directors  and  tlie  latter  appoint  the 
officers. 

The  directors  of  a  bank  meet  regular!}^  to  consider 
the  character  of  the  paper  offered  for  discount,  and 
to  consult  regarding  the  general  business  of  the 
bank.  Sometimes  the  directors  give  the  president 
or  cashier  authority  to  pass  upon  paper  offered  for 
discount. 

The  ordinary  officers  of  a  bank  are  the  President, 
who  is  the  chief  executive  officer;  the  Cashier,  who 
is  the  manager  of  the  internal  workings  of  the  bank; 
the  Paying  Teller,  who  pays  out  all  moneys  and  has 
charge  of  the  working  cash  of  the  bank;  he  is  familiar 
with  the  signature  of  each  depositor  and  with  his 
daily  balance,  and  is  really  one  of  the  most  important 
officers  of  the  bank.  He  should  be  a  man  of  good 
ability  and  accurate  judgment,  and  withal,  pos- 
sessed of  patience  and  unwavering  good  nature.  The 
Receiving  Teller  receives  all  moneys  coming  into  the 
bank,  and  makes  the  entries  in  the  depositors'  pass- 
books. The  Note  Clerk  has  charge  of  the  commercial 
paper  handled.  The  Bookkeeper  and  his  assistants 
have  charge  of  the  ledgers  and  other  account  books. 

§  46.  Bank  Loans. — A  portion  of  the  loans  of 
many  banks  consists  of  investments  in  solid  bonds, 
but  the  bulk  of  the  loans  of  banks  are  made  on  com- 
mercial paper;  time  and  demand  loans  are  made 
upon  collaterals  of  many  descriptions.  The  larger 
banks  loan,  on  an  average,  from  fifty  to  one  hundred 
thousand  dollars  a  day.  A  very  large  proportion  of 
the  commercial  paper  discounted  is  first  handled  by 
note  brokers. 


54  BANKING,  CREDIT  AND  FINANCE 

Banks  discount  paper  for  their  depositors — and 
simply  term  the  operation  discounting;  but  when 
they  go  outside  of  their  line  of  depositors,  in  making 
investments  in  time  paper,  they  call  it  buying  paper. 
They  generally  buy  from  private  bankers  and  note 
brokers. 

National  banks  are  prohibited  from  loaning  over 
ten  per  cent  of  their  capital  and  sui*plus  to  any  one 
individual  or  corporation,  except  upon  paper  repre- 
senting actually  existing  merchandise. 

§•  47.    Use  of  Instruments  of  Credit. — All  the 

wholesale  transactions  of  business  and  a  large  part 
of  the  retail  transactions  are  completed  by  the  pass- 
ing of  instrmnents  of  credit  or  negotiable  paper,  as 
notes,  drafts,  checks,  etc.;  a  part  of  the  retail  trade 
only  is  conducted  by  what  is  called  cash,  that  is, 
bills  and  small  change.  It  is  the  function  of  banks 
to  deal  with  these  transferable  instruments  legally 
called' 'titles." 

Banks  deal  to  a  very  small  extent  in  actual  money. 
The  notes,  drafts,  bills  of  exchange  and  bank 
deposits  are  representative  of  the  property  passing 
by  title  in  money  from  the  producers  to  the  con- 
sumers. A  small  proportion,  perhaps  six  or  eight  per 
cent,  of  these  transactions  is  conducted  by  the  use 
of  actual  bank  or  legal  tender  notes. 

This  trade  in  instruments  of  credit  amounts  to 
something  like  fifty  billions  of  dollars  yearly.  The 
losses  through  mercantile  failures  rarely  exceed  one 
hundred  millions  a  year,  that  is  one  dollar  in  every 
five  hundred,  or  one-fifth  of  one  per  cent  of  the  gross 
amount  of  business. 


METHODS  OF  BANKING  55 

§  48.  Borrowing  from  Banks. — It  is  the  business 
of  a  bank  to  loan  money  to  responsible  persons,  with- 
in reasonable  limits.  The  regular  customer  of  the 
bank  is  entitled  to  and  will  receive  the  first  considera- 
tion if  the  demand  is  larger  than  the  bank  can  safely 
meet. 

A  business  man  should  not  hesitate,  when  occasion 
requires,  to  offer  his  bank  any  paper  he  may  want 
discounted,  if  in  his  opinion  it  is  good,  nor  should  he 
be  offended  if  his  banker  refuses  to  take  it,  even  with- 
out giving  reasons. 

Make  your  own  notes  and  acceptances  payable  at 
your  bank.  Keep  a  careful  record  of  the  dates  of 
maturity  of  all  paper  which  you  make  or  indorse. 
It  is  usually  better,  that  is,  more  convenient  to  the 
holder,  to  pay  your  note  early  on  the  day  it  falls  due, 
rather  than  a  day  or  two  before. 

§'  49.  Rates  for  Loans. — ^In  loaning  money  on 
demand,  when  it  is  strictly  understood  between  bank 
and  borrower  that  the  money  so  advanced  is  positive- 
ly minute  money — money  returnable  at  any  minute, 
when  the  bank  calls  for  it — banks  usually  charge 
low  rates  of  interest.  When  interest  rates  are  high, 
bankers  prefer  to  deal  in  long-time  paper.  This 
general  rule  is  reversed  when  the  situation  is  re- 
versed. 

Bankers  aim  also  to  scatter  and  locate  their 
maturities  so  that  as  the  seasons  roll  around,  they 
will  not  have  very  large  amounts  maturing  at  one 
time  and  very  small  amounts  at  another.  They  plan 
also  to  be  *'in  funds"  at  those  seasons  when  there  is 
always  a  large  and  profitable  demand  for  money. 


56  BANKING,  CREDIT  AND  FINANCE 

For  instance  in  the  centers  of  the  cotton  manu- 
facturing interest  the  banks  count  on  a  large  demand 
for  money  between  October  and  January  when  the 
bulk  of  the  purchases  to  supply  the  mills  are  made : 
again,  among  those  who  operate  and  deal  in  wool 
there  is  an  active  demand  for  money  in  the  wool  clip 
in  the  spring  months.  The  wheat  and  corn  crops  are 
autumn  consmners  of  money.  Midwinter  and  mid- 
summer in  the  north  are  usually  periods  of  com- 
parative stagnation  in  the  money  market. 

All  these  things  affect  rates,  and  the  successful 
banker  is  he  who  from  observation  and  large  experi- 
ence shows  the  most  skill  in  timing  his  money  supply. 

§•  50.  When  Interest  Accrues. — There  are  certain 
well-defined  principles  which  make  clear  when  in- 
terest is  accruing  and  w^hen  it  is  not.  Money 
voluntarily  left  by  any  one  in  the  hands  of  another 
will  not,  of  course,  draw  interest  unless  a  specific 
mutual  agreement  to  that  effect  is  made.  In  most 
cases,  a  demand  note  bears  interest  even  though 
there  be  no  statement  to  this  effect  on  the  face  of 
the  note. 

Money  on  deposit  in  a  bank  without  an  agreement 
to  pay  interest  will  not  accumulate  interest  even 
though  it  remain  fifty  years. 

§  51.  Forged  Indorsements. — A  bank  is  supposed 
to  know  the  signatures  of  its  depositors.  It  is  one 
of  its  first  and  most  important  duties  to  have  them 
on  file  and  immediately  accessible  by  the  use  of  a 
well-kept  signature  book  or  card  system. 

Holders  of  checks,  in  very  many  cases,  know 
nothing  about  these  drawer-signatures.    They  have 


METHODS  OF  BANKING  57 

taken  them  supposing,  of  course,  that  they  are  gen- 
uine. When  they  have  collected  the  checks  at  the 
bank  upon  which  they  are  drawn  they  are  to  a  very 
great  extent  relieved  of  all  further  responsibility  as 
to  the  signatures  of  the  signers,  for  the  bank  by  pay- 
ing them  has  guaranteed  their  genuineness. 

But  the  bank  which  cashes  for  a  good  holder  a 
much  indorsed  check,  the  signature  of  which  is  all 
right,  generally  knows  nothing  about  its  many  in- 
dorsements beyond  the  fact  that  they  seem  to  be  all 
right  and  stand  there  in  regular  order,  apparently 
correctly  made.  For  the  honesty  and  genuineness 
of  these  many  or  few  preceding  indorsements  the 
last  holder,  for  whom  the  check  is  cashed,  whether 
he  indorse  the  check  or  not,  is  fully  and  legally  held, 
and  no  reasonable  lapse  of  time  before  a  discovery 
of  the  forgery  is  made  will  relieve  him  of  this  liabil- 
ity. 

§  52.  The  Credit  Department. — One  of  the  most 
valuable  parts  of  a  banker's  education  is  to  learn 
whom  to  trust.  Every  bank  should  have  a  well- 
organized  and  thoroughly  equipped  credit  depart- 
ment, in  charge  of  some  one  who  can  be  relied  upon 
to  investigate  carefully  all  names  referred  to  him 
by  the  officers. 

A  man  who  desires  to  borrow  money  from  a  bank 
should  offer  the  same  confidence  that  he  would  offer 
if  he  were  going  to  a  wholesale  dealer  to  buy  goods. 
The  merchant  has  a  commodity  to  sell  and  he  looks 
for  facts  which  will  aid  him  in  determining  the  line 
of  credit  to  be  granted.  The  banker  has  money  to 
sell  and  he  should  be  doubly  sure  of  the  responsibility 
of  the  party  to  whom  he  is  selling  it  because  the 


58  BANKING,  CREDIT  AND  FINANCE 

money  does  not  belong  to  him.  A  banker  has  a 
right  to  expect  the  fullest  confidence  on  the  jmrt  of 
the  borrower,  and  the  borrower  should  furnish  him 
with  a  complete  and  detailed  statement  of  the  condi- 
tion of  his  affairs.  It  is  safe  to  conclude  that  when 
a  borrower  refuses  absolutely  to  give  any  information 
as  to  his  financial  condition,  his  credit  is  not  in  the 
most  favorable  condition. 

§  53.  Statements  for  Credit. — Many  of  the  banks 
have  blank  forms  which  they  from  tune  to  time  ask 
borrowers  to  fill  out.  These  statements  show  in  de- 
tail the  assets  and  liabilities  of  the  individual  firm, 
or  company  in  question;  they  show  the  notes  which 
are  outstanding,  the  mortgages  on  real  estate,  and 
many  other  particulars  including  the  personal  or 
individual  credit  of  members  of  the  firm,  if  a  partner- 
ship. The  total  net  worth  of  the  borrower  should  be 
first  considered;  then  the  character  of  his  business, 
whether  it  is  speculative  or  staple;  then  his  record 
and  standing  in  the  connnunity;  then  his  business 
habits;  then  a  consideration  of  whether  he  is  in  en- 
terprise abreast  with  modern  ideas  and  methods. 

§  54.  Paper  Offered  for  Discount. — The  paper  of- 
fered for  discount  is  of  a  variety  of  kinds.  The  larger 
proportion  of  it  is  from  customers  of  the  borrower 
fwho  have  extended  their  credit  by  paying  their  ac- 
counts in  notes  instead  of  in  cash.  Such  paper  is 
ireally,  though  having  two  names,  very  little  better 
than  single-name  paper,  for  it  is  not  the  maker's 
credit,  but  the  payee's,  which  the  bank  usually  con- 
siders. Many  very  small  notes  offered  for  discount 
usually  indicate  a  very  needy  condition. 

There  are  times  when  the  character  of  the  mer- 


METHODS  OF  BANKING  59 

chandise  owned  by  the  borrower  should  be  con- 
sidered. What  would  it  bring  under  the  hammer? 
Groceries  and  raw  materials  can  usually  be  turned 
into  cash  at  a  forced  sale  at  very  small  discount 
from  current  prices.  Not  so  with  hardware,  glass, 
dry  goods,  boots  and  shoes,  books,  etc.  Machinery 
and  fixtures  are  not  a  bankable  asset  upon  which 
to  base  credit. 

The  banker  should  also  note  his  borrower's  bills 
payable.  Why  did  he  give  notes?  Are  they  met 
promptly?  Many  houses  prefer  to  sell  their  own 
paper  in  the  open  market  and  keep  their  banksi 
open  for  accommodations  when  they  are  unable  to 
secure  outside  credit. 

The  insurance  carried  should  be  considered,  also 
the  volume  of  business  done.  A  large  business  on 
moderate  capital,  with  long  credits,  will  naturally* 
have  large  liabilities,  while  a  small  business,  with 
liberal  capital,  and  short  credits,  should  have  small 
liabilities. 

There  are  many  firms  which  carry  two  or  more 
bank  accounts  and  others  who  sell  their  paper  to  out- 
of-town  banks.  In  buying  paper  it  is  important  to 
ascertain  whether  the  firm  is  in  the  habit  of  taking 
up  paper  at  one  bank  by  floating  a  note  at  another. 

§  55.  Classification  of  Paper. — ^A  prominent 
banker  classifies  paper  as  to  its  discount  value  as 
follows : 

(a)  Bankers'  paper,  including  bills  of  exchange. 

(b)  Remittance  paper — bills  drawn  by  houses 
abroad  on  banks  or  correspondents  in  Europe. 


60  BANKING,  CREDIT  AND  FINANCE 

(c)  Inland  drawn  paper — bills  drawn  by  shippers 
of  goods  on  the  houses  to  whom  the  goods  are 
shipped. 

(d)  Broker's  Paper. — Bills  drawn  by  importers 
against  commodities  placed  in  brokers'  hands  for 
sale. 

(e)  Trade  paper — bills  arising  out  of  our  mani- 
fold trades  and  industries. 

(f )  Drafts  with  bills  of  lading  attached. 

(g)  Paper  having  personal  indorsements, 
(h)  Paper  secured  by  collateral. 

(i)  Individual — or  one  name  paper. 

§  56.  Usury  and  Its  Penalty. — The  laws  of  some 
of  the  states  for  collecting  more  than  the  legal  rate 
of  interest  are  quite  severe.  National  banks  which 
collect  more  than  the  legal  rate  can  only  be  proceeded 
against  under  the  U.  S.  Interest  Penalty  Act,  which 
provides  that  usury  shall  be  punished  by  a  forfeiture 
of  twice  the  amount  of  interest  paid,  if  action  is 
commenced  within  two  years  of  the  time  of  such 
usurious  practice,  and  that  recovery  can  be  had  for 
the  entire  amount  of  interest  paid  at  any  time. 

§  57.  Bank  Examinations. — National  banks  are 
examined  once  or  twice  a  year  by  a  United  States 
bank  examiner,  who  has  authority  from  the  Comp- 
troller of  the  Currency,  to  whom  his  reports  are 
made.  These  reports  are  seldom  if  ever  seen  by  bank 
officers,  and  unless  the  examiner  chooses  to  inform 
them  that  everything  is  right  they  are  none  the 
wiser. 


METHODS  OF  BANKING  61 

When  a  national  bank  becomes  embarrassed  it  is 
the  business  of  the  bank  examiner  to  look  thoroughly 
into  its  affairs  and  if  necessary  to  close  its  doors. 

g  58.  Bank  Statements. — ^A  bank  statement  is  a 
balance-sheet  of  the  bank 's  main  ledger,  and  is  sworn 
to  by  the  cashier  and  attested  by  several  of  the  di- 
rectors. It  is  published  at  the  time  of  its  making  in 
the  local  newspaper. 

The  resources  in  such  a  statement  usually  consist 
of  items  due  from  other  financial  institutions,  bank 
bills,  and  specie  on  hand,  bonds  deposited  with  the 
United  States  treasurer;  loans  and  discounts,  con- 
sisting of  discounted  notes,  drafts,  etc.,  owned  and 
held  by  the  bank  and  w^hich  are  maturing  and  being 
paid  from  day  to  day;  real  estate,  etc. 

The  liabilities  consist  of  the  accounts  due  de- 
positors and  other  banks;  outstanding  circulation  of 
bank  notes;  undivided  profits;  surplus  fund;  original 
capital  stock,  etc. 

§  59.  Bank  Debits  and  Credits. — The  bank's 
debits  for  any  day  may  consist  of  the  following 
items: 

(a)  Deposits — the  gToss  amount  of  money  re- 
ceived on  deposit. 

(b)  Matured  loans — notes  discounted  that  have 
been  paid. 

(c)  Interest — ^money  received  for  interest  from 
all  sources. 

(d)  Exchange — money  received  as  exchange  on 
collections. 


62  BANKING,  CREDIT  AND  FINANCE 

(e)  Discount — Hie  discounts  on  notes  and  other 
commercial  paper. 

(f)  U.  S.  Treasury — remittances  received  in  pay- 
ment for  notes  sent  for  redemption. 

(g)  Circulation — new  bank  notes  of  the  bank's 
own  issue  received  from  Comptroller  of  the  Cur- 
rency. 

The  bank's  credits  may  consist  of  the  following: 

(a)  Checks — paid  during  the  day. 

(b)  Loans — gross  amount  of  net  proceeds  of 
paper  discounted. 

(c)  Expense — running  expenses  of  the  bank. 

(d)  Interest — on  deposits  and  rebates  on  prepaid 
discount  paper. 

(e)  Exchange — cost  of  collections  made,  charges 
on  foreign  paper,  etc. 

(f)  Dividends — paid  stockholders. 

(g)  U.  S.  Treasury — cash  sent  for  new  small  legal 
tenders,  etc. 

(h)  Circulation — ^notes  of  the  bank's  own  issue 
retired  in  any  way. 

§  60.  Accurate  Interest. — The  Treasury  Depart- 
ment at  Washington  pays  accurate  interest,  founded 
on  a  basis  of  365  days  to  the  year.  The  great  major- 
ity of  banks  pay  and  charge  interest  on  a  basis  of 
360  days  to  the  year. 

§  61.  Money  ' '  On  Call. ' ' — ^National  banks  located 
in  clearing-house  centers,  find  it  a  very  convenient 
thing  to  put  out  quite  a  percentage  of  their  loans  on 
call.    In  some  cities  banks  have  a  habit  of  borrowing 


METHODS  OF  BANKING  63 

on  call  from  each  other  on  clearing-house  settlements. 
Call  notes  are  payable  on  demand  and  are  secured  by 
demand  notes. 

§  62.  Collaterals. — If  a  business  man  borrow 
$1,000  from  a  bank  on  his  note  and  give  ten  shares  of 
stock  to  the  bank  to  be  held  by  it  simply  as  security, 
the  stock  thus  given  would  be  termed  collateral. 
These  collaterals  are  not  the  bank's  property,  and 
the  bank  is  responsible  for  their  safe-keeping.  If 
coupons  mature  while  bonds  are  being  held  as  col- 
lateral, the  owners  are  usually  allowed  to  collect  the 
amount  for  which  they  sell.  Sometimes  one  note  is 
given  as  collateral  security  for  another  which  is 
discounted. 

§  63.  The  Bank's  Cash. — The  actual  usable  cash 
of  a  bank  is  represented  by  the  gold,  silver,  and  bills 
on  deposit. 

It  is  estimated  that  the  gold  in  use  in  the  world 
amounts  to  $9,000,000,000,  and  that  an  equal  amount 
has  been  lost  through  wear  and  other  causes  since 
the  earliest  times.  A  miUion  dollars  in  gold  could  be 
put  into  a  box  two  feet  square  and  a  foot  deep.  All 
the  gold  in  the  world  could  be  put  into  a  room  64  feet 
by  50  feet  with  a  height  of  20  feet. 

The  gold  in  our  banks  lies  piled  in  bags  containing 
$5,000  each.  Each  bag  weighs  twenty-two  pounds. 
Standard  gold  is  worth  $18.96  an  ounce,  and  a  $20 
gold  piece  weighs  211/2  pennyweights.  In  shipping 
gold  from  New  York  to  London  it  is  estimated  that 
a  million  dollars  in  gold  may  be  reduced  in  value,  by 
the  coins  rubbing  against  each  other,  about  $175. 

If  a  standard  gold  coin  falls  short  one-half  of  one 


64  BANKING,  CREDIT  AND  FINANCE 

per  cent  of  its  original  standard  weight,  it  is  marked 
*' light  weight"  the  moment  it  reaches  the  United 
States  Treasurer.    It  then  ceases  to  travel  as  money. 

The  United  States  bills  which  are  considered  cash 
are  of  a  variety  of  kinds,  including  notes  of  the  fol- 
lowing denominations:  $1,  $2,  $5,  $10,  $50,  $100,  $500, 
$1,000.  These  are  payable  in  coin,  either  gold  or 
silver. 

The  total  amount  of  money  in  circulation  in  the 
United  States  on  July  1,  1920,  was  $6,084,854,578  in- 
cluding the  following:  Gold  Coin,  $834,687,970;  gold 
certificates,  $390,522,834;  standard  silver  dollars 
$133,978,687;  silver  certificates,  $118,521,774;  subsid- 
iary silver,  $251,104,384;  Treasury  notes  of  1890, 
$1,656,355;  United  States  notes,  $337,299,793; 
Federal  reserve  notes  $3,122,001,747;  Federal  re- 
serve bank  notes,  $198,735,191;  national  bank  notes, 
$696,345,834. 

§  64.  Paper  Currency. — The  national  bank  notes 
are  really  promissory  notes,  issued  by  the  banks, 
and  payable  on  demand.  They  are  secured  by,  and 
issued  upon,  the  deposit  of  United  States  bonds  or 
certificates  of  indebtedness.  Every  natio^al  bank 
must  redeem  its  notes  in  full  in  lawful  money  at  the 
Treasury  in  Washington  or  over  its  own  counter 
whenever  a  demand  for  payment  is  made.  The 
denominations  of  the  national  bank  notes  are  the 
same  as  those  of  the  United  States  notes. 

The  gold  and  silver  certificates  are  notes  issued  by 
the  United  States  government  and  payable  on  de- 
mand in  gold  and  silver  dollars  respectively. 

§  65.    Mutilater  Currency.— Notwithstanding  the 


METHODS  OF  BANKING  65 

fact  that  the  paper  used  is  of  the  very  best  quality, 
paper  money,  the  world  over,  is  constantly  becom- 
ing ragged  and  mutilated,  and  it  may  be  well  to 
quote  here  the  law  which  regulates  the  redemption 
of  mutilated  bills.  If  the  whole  face  of  a  note  is  in 
a  condition  which  will  permit  its  being  recognized 
as  a  genuine  bill  it  will  be  paid  in  full.  If  not  more 
than  two  fifths  of  the  paper  of  a  national  bank  note 
is  gone  and  the  note  shows  the  name  of  the  bank  and 
the  signature  of  one  of  its  officers,  it  will  be  paid  in 
full. 

"United  States  notes,  Treasury  notes  of  1890,  fractional- 
currency  notes,  gold  certificates,  silver  certificates,  and  na- 
tional bank  notes,  when  mutilated  so  that  less  than  three- 
fifths,  but  clearly  more  than  two-fifths,  of  the  original  pro- 
portions remains,  are  redeemable  by  the  Treasurer  only, 
at  one-half  the  face  value  of  the  whole  note  or  certificate. 
Fragments  not  clearly  more  than  two-fifths  are  not  re- 
deemed, unless  accompanied  by  a  satisfactory  affidavit. 

"Fragments  less  than  three-fifths  are  redeemed  at  the 
face  value  of  the  whole  note  when  accompanied  by  an  affi- 
davit of  the  owner  or  other  person  having  knowledge  of  the 
facts  that  the  missing  portions  have  been  totally  destroyed." 

§  66.  Counterfeit  Notes. — All  United  States  notes 
are  printed  in  sheets  of  four  notes  of  one  denomina- 
tion on  each  sheet.  Each  note  is  lettered  and 
numbered  twice.  All  notes  of  which  the  number 
when  divided  by  4,  show^s  remainder  of  1,  have  the 
check  letter  A;  a  remainder  of  2,  the  check  letter 
B ;  a  remainder  of  3,  the  check  letter  C ;  those  numbers 
which  divided  by  4  show  no  remainder,  have  the 
check  letter  D.  Any  United  States  note  the  number 
of  which  cannot  be  divided  by  4  and  show  one  of  the 
foregoing  results  is  a  counterfeit. 

There  are  no  secrets  in  the  art  of  detecting  counter- 


66  BANKING,  CREDIT  AND  FINANCE 

feits.  Careful  study,  long  experience,  and  a  thorough 
familiarity  with  all  kinds  of  genuine  bills,  will  make 
any  person  an  expert.  Banks  are  required  by  law 
to  stamp  as  "Counterfeit"  all  bad  bills  coming  into 
their  possession. 

§  67.  A  Depositor's  Credit. — As  a  rule,  banks  do 
not  make  known  even  to  a  single  individual  the  ex- 
tent of  a  customer's  business  or  the  size  of  his  bank 
account.  However,  any  shareholder  in  a  bank  has 
a  right,  as  one  of  the  proprietors,  to  examine  the 
books,  so  long  as  such  examination  is  not  an  un- 
reasonable interference  with  the  regular  routine  of 
work;  and  it  is  pretty  generally  known  that  a  large 
depositor  can  either  directly  or  through  some  other 
bank  get  at  the  condition  of  a  small  depositor's 
account. 

§  68.  Giving  Bonds  for  Faithful  Service. — Bank 
clerks  and  officers  are  usually  required  to  give  bonds, 
that  is,  they  must  get  some  person  to  go  their  surety, 
thus  guaranteeing  faithful  service,  and  agreeing  to 
make  good  any  losses  caused  by  defalcation  or  care- 
lessness. There  are  now  several  surety  companies 
that  give  bonds  for  everyone  and  anyone  whom  they 
consider  a  "good  risk,"  upon  the  payment  of  certain 
premiums  as  in  insurance. 

If  a  young  man  is  an  applicant,  say,  for  a  position 
in  a  bank  and  the  bank  requires  that  some  one  give 
a  bond,  that  is,  go  his  surety,  for  $10,000,  and  the 
young  man  has  no  rich  father  or  other  relative  to 
guarantee  the  house  against  loss,  he  applies  to  a  bond 
insurance  company  and  if  his  record  and  habits  arc 
good  he  has  no  difficulty  in  securing  the  necessary 
papers. 


METHODS  OF  BANKING  67 

The  amount  of  the  bond  required  depends  upon 
the  importance  of  the  position  applied  for.  Presi- 
dents of  banks  do  not  usually  give  bonds. 

The  bonds  of  personal  friends  have  always  a  good 
deal  of  moral  weight  and  force  and  for  this  reason 
are  considered  superior  to  the  bonds  granted  by  a 
guarantee  company.  Such  a  bond  is  really  a  testi- 
monial, and  the  last  one  that  is  likely  to  be  violated. 
The  record  shows  that  marvelously  few  employees 
have  violated  such  bonds. 

The  guarantee  companies  look  into  a  man's  stand- 
ing very  thoroughly  before  taking  the  risk  of  becom- 
ing his  surety.  When  an  application  is  made,  refer- 
ences are  given  and  the  company  corresponds  with 
the  persons  whose  names  are  given  as  references 
and  asks  a  great  many  very  important  questions.  A 
young  man  with  good  social  standing  can  usually 
secure  bonds  for  five  or  ten  thousand  dollars  by  the 
payment  of  a  small  annual  premium. 

§  69.  Mercantile  Agencies. — In  large  cities  and 
towns,  bankers  and  other  business  men  often  avail 
themselves  of  the  advantages  offered  by  mercantile 
agencies.  These  concerns  report  to  their  subscribers 
upon  the  credit  of  men  in  various  lines  of  business.. 
They  gather  their  information  from  a  variety  of 
sources.  This  service  has  been  very  much  improved 
of  late  years,  and  after  making  all  due  allowance 
for  the  inherent  defects  of  the  system,  it  is  still  a 
useful  adjunct  to  the  man  who  is  giving  credit. 

§•  70  Savings  Banks. — Savings  banks  have  no 
special  capital  owned  by  the  stockholders.  Their  capi- 
tal is  the  money  received  on  deposit,  which,  of  course, 
is  the  property  of  a  great  many  people.    Every  de- 


68  BANKING,  CREDIT  AND  FINANCE 

positors  is  an  owner  in  tlie  banlc,  and  the  profit 
is  paid  to  depositors  in  interest.  This  capital  is 
invested  in  choice  securities.  The  corporation  is 
simply  the  agent  or  trustee  of  the  whole  body  of 
depositors,  and  works  for  their  account  and  benefit 
and  not  for  its  own. 

In  most  of  the  States,  the  savings  banks  are  or- 
ganized under  State  laws  and  are  in  a  limited  way 
under  State  supervision.  Their  chief  purpose  is  to 
encourage  the  saving  of  money  by  the  common 
people. 

The  Postal  Saving  bank  system  of  the  United 
States,  though  of  recent  establishment,  received  de- 
posits in  the  fiscal  year  ending  June  30, 1919,  amount- 
ing to  $136,838,361. 

§  71.  Defalcations  and  Embezzlements. — An  ex- 
perienced banker  offers  the  following  suggestions  to 
prevent  defalcations  and  embezzlements  through  the 
manipulating  of  the  bank's  record  books:  Secure 
clerks  of  high  character  and  integrity  and  have  a 
proper  system  of  accounts  with  a  perfect  system 
of  checking  everything.  If  possible  keep  accounts 
in  duplicate.  The  balance  ledger  can  be  proved  to 
a  cent  every  day,  and  this  should  certainly  be  done. 
When  practicable,  it  is  better  to  have  all  differences 
investigated,  and  reported  upon  by  some  one  who 
is  not  directly  responsible. 

A  number  of  banks  in  the  large  cities  have  created 
the  position  of  auditor  of  accounts,  and  it  is  one  of 
his  duties  to  report  to  the  cashier  direct  upon  aU 
differences.  This  auditor  reconciles  accounts-cur- 
rent mth  out-of-town  correspondents,  balances  and 
delivers  all  passbooks,  and  furnishes  information  to 


METHODS  OF  BANKING  69 

all  depositors  respecting  their  accounts.  A  great 
benefit  is  secured  to  a  bank  by  the  examination  of 
one  man's  work  by  another. 

Passbooks  of  active  accounts  should  be  written 
up  once  a  month,  and  no  passbook  should  run  longer 
than  two  months  before  being  balanced.  It  should 
be  a  rule  in  every  bank  that  no  charge  entry  should 
be  put  through  the  books,  except  from  a  i^ruper 
voucher,  that  is,  a  check  signed  by  a  depositor,  or  a 
charge  ticket  made  out  and  signed  by  an  officer  of  the 
bank.  The  discount  clerk  and  the  collection  clerk 
should  not  be  the  same  person  and  neither  of  them 
should  be  the  corresponding  clerk.  The  monthly 
accounts-current  rendered  by  a  city  correspondent 
should  be  reported  upon  promptly,  and  any  disposi- 
tion on  the  part  of  the  bookkeeper  to  delay  or  neglect 
this  matter  should  be  corrected. 

A  very  important  requisite  in  modern  banking  is 
a  system  of  thorough  examination  at  irregular  inter- 
vals. No  teller,  bookkeeper,  or  other  clerk  can  suf- 
fer the  slightest  harm  from  having  his  cash  and  books 
examined  and  found  correct.  All  notes  held  for 
collection  should  be  accounted  for,  and  balances  due 
from  other  banks  for  collections  should  be  verified. 
Special  deposits  of  securities  held  for  safekeeping 
should  be  examined  occasionally.  The  more  complex 
the  bookkeeping  the  easier  it  is  to  '*cook"  the  ac- 
counts. 

§  72.  Commercial  Crises. — Disturbances  of  the 
course  of  trade  arise  largely  from  the  necessity  of 
readjusting  its  conditions  to  the  common  standard 
and  measure  of  value.  The  common  standard  of 
value  is  money,  and  the  conditions  of  trade  which 


70  BANKING,  CREDIT  AND  FINANCE 

require  to  be  adjusted  to  it  are  the  price  of  com- 
modities, and  contracts  and  obligations  of  all  kinds. 
Contracts  and  obligations,  agreements  to  pay  money 
at  a  future  time  for  something  presently  received, 
form  the  credit  system  of  modern  commerce.  In- 
ability to  meet  these  obligations  constitutes  bank- 
ruptcy, and  a  great  multiplicity  of  bankruptcies 
occurring  simultaneously  constitutes  a  commercial 
crisis. 

If  all  persons  were  in  the  habit  of  paying  im- 
mediately for  everything  received,  there  could  be  no 
debts,  and  consequently  no  f  ailm^es  nor  panics.  Those 
nations  where  the  credit  system  has  received  its 
wddest  development,  and  where  consequently  the 
spirit  of  commercial  adventure  and  speculation  is 
most  rife,  are  most  exposed  to  the  ravages  of  recur- 
ring periods  of  banl^ruptcy. 

Money  panics  are  usually  preceded  by  years  of 
active  trade,  high  wages,  multiplication  of  new 
enterprises,  and  general  prosperity.  Each  period  of 
abnormal  and  exciting  prosperity  is  followed  by  a 
violent  collapse,  resulting  in  increased  rates  of  inter- 
est, closing  of  factories,  failures  of  mercantile  houses, 
and  enforced  idleness  of  large  numbers  of  people, 
often  resulting  in  extreme  social  disturbances. 
There  is  no  remedy  except  in  the  concurrence  of 
mankind  to  keep  out  of  debt  and  to  avoid  all  tempta- 
tion to  make  gain  without  equivalent  labor.  This 
is  impossible,  however.  Civilization  is  so  interlaced 
with  the  credit  system  that  it  is  idle  to  talk  of  abolish- 
ing it.  The  interests  of  mankind  require  that  it 
should  continue,  even  at  the  cost  of  its  abuses. 

There  is,  too,  a  desire  for  gain  without  labor 


METHODS  OF  BANKING  71 

wMch  is  legitimate.  Nine-tenths  of  all  the  inventions 
and  discoveries  which  have  advanced  mankind  from 
the  stone  age  to  the  age  of  electricity  have  had  theii* 
origin  in  this  desire.  It  may  be,  too,  that  an  oc- 
casional crisis  is  a  good  thing,  inasmuch  as  it  shows 
commercial  leaders  by  an  object  lesson  the  influences 
w^hich  tend  to  malve  trade  successful  or  disastrous. 

§  73.  Emergency  Currency. — The  year  1893  may 
be  taken  as  an  example  of  a  period  of  financial 
stringency.  Beginning  in  August  of  that  year,  with- 
in a  single  month  a  currency  famine,  due  to  a  variety 
of  causes,  became  general.  The  banks  ceased  to 
loan  money,  many  of  them  fearing  * '  a  run.' '  Interest 
reached  20,  50,  and  100  per  cent.  The  banks  of  one 
city  refused  to  accept  drafts  on  another.  Some  hun- 
dreds of  banks  were  compelled  to  close  their  doors. 
The  country  had  been  doing  ninety  per  cent  of  its 
business  upon  credit  instruments — not  actual  money, 
and  when  these  instrunients  were  refused  a  financial 
panic  was  the  result.  Men  preferred  currency  in 
hand  to  the  best  kind  of  credit  account,  and  as  a 
result  the  actual  money  was  locked  up  in  private 
vaults.  Currency  became  so  scarce  that  it  had  to 
be  bought  as  merchandise  at  a  heavy  premium. 
Merchants  were  forced  to  send  by  express  the  actual 
bills  to  meet  distant  accounts  and  to  pay  the  ex- 
penses of  their  families  at  the  summer  resorts. 
Checks  were  useless  away  from  the  banks  upon 
which  they  were  drawn.  More  than  $300,000,000 
was  withdrawn  from  the  banks  and  hoarded  by  the 
owners. 

§•  74.  Clearing-House  Certificates. — This  situa- 
tion brought  into  local  circulation  several  forms  of 


72  BANKING,  CREDIT  AND  FINANCE 

currency — credit  instruments — which  were  decid- 
edly unique.  The  most  common  of  these  were  the 
emergency  clearing-house  certificates,  their  object 
being  to  extend  indefinitely  the  brief  term  of  mutual 
credit  involved  in  all  clearing-house  settlements. 
They  were  in  reality  not  used  as  currency,  but  their 
effect  w^as  to  add  their  face  value  to  the  volume  of 
currency  in  circulation,  by  releasing  for  use  outside 
that  which  would  otherwise  have  been  reserved  for 
clearing-house  settlements.  In  each  instance  the  use 
of  the  certificates  was  limited  strictly  to  settlement 
of  mutual  accounts  between  members  of  the  particu- 
lar clearing-house  association  issuing  the  certificate. 
The  certificates  were  issued  to  banks  upon  securities 
which  they  furnished.  Such  certificates  were  also 
used  during  the  financial  depression  of  1907-08. 

Other  devices  of  similar  character  were  clearing- 
house due  bills.  These  stated  that  a  certain  sum 
w^as  due  by  a  particular  bank  to  some  other  or  to 
the  order  of  some  individual  and  usually  had  the 
following  additional  wording:  "This  due  bill  is  only 
good  when  signed  by  one  and  countersigned  by  an- 
other authorized  person  and  is  payable  only  in  the 
exchanges  through  the  clearing-house  the  day  after 
issue." 

§  75.  Bankers'  Expedients. — ^Another  expedient 
favored  in  all  parts  of  the  country,  was  the  sale  by 
banks  of  certified  checks  against  themselves  for 
currency  denominations,  which  when  signed  by  the 
purchaser,  w  ere  used  by  him  as  currency. 

Most  generally  used  of  all,  however,  were  pay 
checks  in  currency  denominations,  which  in  scores 
of  manufacturing  towns,  were  the  only  currency  that 


METHODS  OF  BANKING  73 

was  available  for  weekly  payments  and  cash  x>ur- 
chases  by  wage-earners. 

In  addition  to  these  well-defined  classes,  there 
were  others  so  varied  that  but  a  suggestion  of  them 
can  be  made — negotiable  certificates  of  deposit; 
ninety-day  and  other  short  time  paper  in  currency 
denominations;  bond  certificates;  grain  purchase 
notes;  credit  and  corporation  store  orders;  improve- 
ment fund  orders;  teachers'  warrants;  shingle  scrip, 
etc.  In  every  case  where  the  associated  banks  of  a 
section  failed  to  supply  the  needed  currency,  in- 
dividuals and  corporations  were  compelled  to  re- 
sort to  extraordinary  devices.  This  illegal  bank- 
note currency  was  accepted  by  the  community,  the 
financial  conditions  became  normal  again,  and  every 
credit  instrument  was  made  good  in  actual  money. 

§  76.  Trust  Companies. — The  ordinary  trust 
company  with  which  city  people  are  familiar  is  veiy 
similar  in  its  management  to  a  national  bank.  It 
invests  its  deposits  and  capital  in  the  same  class  of 
securities,  and  is  equally  careful  and  conservative 
in  the  matter  of  its  loans.  It  receives  money  on  de- 
posits which  exceed  a  nominal  sum — usually  from 
$300  to  $1,000.  Trust  companies  are  organized  under 
and  are  subject  to  state  laws.  They  have  connection 
with  the  clearing-houses  either  direct  or  through 
some  convenient  national  bank. 

Trust  companies  are  in  form  of  organization  very 
similar  to  the  great  joint-stock  banks  of  England. 
They  are  usually  authorized  to  receive  and  hold 
moneys  and  property  in  trust  and  on  deposit  from 
courts  of  law  or  equity,  executors,  and  individuals, 
assignees,  guardians,  trustees,  corporations,  and  in- 


74  BANKING,  CREDIT  AND  FINANCE 

dividuals,  and  may  be  appointed  by  probate  courts 
trustees  under  any  will,  upon  such  terms  and  con- 
ditions as  may  be  agreed  upon.  They  act  as  trustees 
for  widows  or  children,  take  charge  of  and  manage 
property,  and  collect  interest  and  rent.  They  act 
as  transfer  agents  for  railroad  and  other  stock,  and 
as  agents  for  the  purpose  of  issuing,  registering,  or 
countersigning  the  certificates  of  stock,  bonds,  or 
other  evidences  of  debt,  and  for  the  payment  of 
dividends.  They  act  as  agents  or  attorneys  for  the 
care  and  management  of  invested  property. 

§  77.  Safe  Deposit  Vaults.— Many  of  the  banks, 
trust  companies,  and  insurance  companies  make  a 
special  feature  of  renting  small  safe  deposit  boxes  or 
drawers  in  their  vaults  to  any  and  every  person  who 
chooses  to  pay  the  rent  asked,  which  depends  largely 
on  the  amount  of  space  needed  and  is  usually  from 
$3  to  $10  for  the  smallest  sized  box.  It  is  very  con- 
venient for  one  who  has  not  a  safe  of  his  o"wn  to  have 
a  secure  place  in  which  to  keep  valuable  papers. 

In  many  of  the  large  safe  deposit  vaults  there  are 
desks  and  stationery  for  customers,  so  that  one  may 
at  any  time  and  very  conveniently  and  privately 
clip  coupons,  examine  one 's  papers  and  make  entries 
dr  indorsements,  or  add  new  vouchers,  or  make 
changes,  as  the  occasion  may  require.. 

§  78.  Suggestions  to  Bank  Clerks. — Ability,  enthu- 
siasm, tact  and  determination  are  as  necessary  in 
banking  as  any  other  commercial  situations.  Many  of 
the  most  successful  bankers  in  the  country  com- 
menced as  messengers  and  passed  from  one  office 
to  another  until  they  became  presidents.  It  should 
be  the  constant  endeavor  of  officers  of  a  bank  who 


METHODS  OF  BANKING  75 

hold  superior  positions  to  cultivate  and  develop  the 
self-respect  of  their  subordinates.  Faithful  ser\'ice 
and  manly  character  in  a  janitor  are  entitled  to  just 
as  much  honor  and  to  as  full  recognition  as  that 
rendered  by  a  cashier.  The  man  makes  the  place,  not 
the  place  the  man. 

It  is  the  general  opinion  of  bankers  that  the  de- 
mand for  the  right  sort  of  bank  clerk  is  much  in  ex- 
cess of  the  supply.  No  young  man,  however,  should 
thinlv  of  entering  uj)on  banking  as  a  profession, 
unless  he  has  a  real  love  for  the  business. 

The  best  position  for  a  young  man,  and  the  one 
affording  the  largest  opportunity  for  promotion  will 
be  that  of  general  assistant.  It  is  considered  better 
to  enter  upon  a  clerkship  in  a  small  bank  than  in  a 
very  large  one,  for  the  reason  that  the  steps  in  the 
ladder  of  success  are  fewer  and  closer. 

The  successful  clerk  must  have  a  true  apprecia- 
tion of  the  value  of  time.  Every  minute  should  be 
strictly  given  to  the  work  of  the  bank.  In  the  matter 
of  promptness  the  higher  officers  should  set  a  good 
example  for  those  in  subordinate  positions.  There 
are  exceptions,  but  as  a  rule  promotions  are  not 
the  result  of  chance.  The  man  in  any  calling  who 
has  the  ability  and  the  desire  to  do  greater  things 
will  sooner  or  later  be  called  upon  to  do  them. 


Questions  for  Review,  Chapter  III. 

1.  How  are  national  and  state  banks  respectively  or- 
ganized ? 

2.  What  are  the  duties  of  the  ordinary  officers  of  a  bank  ? 

3.  What  is  the  actual  usable  cash  of  a  bank  represented 
by? 


76  BANKING,  CREDIT  AND  FINANCE 

4.  What  are  the  regulations  regarding  the  redemption 
of  mutilated  bills? 

5.  In  what  form  are  United  States  notes  printed  ? 

6.  What  is  meant  by  "accurate"  interest? 

7.  What  is  the  character  of  the  great  bulk  of  the  loans 
made  by  banking  institutions? 

8.  What  is  the  nature  of  a  trust  company? 

9.  What  is  the  advantage  to  the  business  community  of 
safe-deposit  vaults? 

10.  What  kind  of  bond  is  usually  given  by  bank  clerks 
and  officers  ? 

11.  What  kind  of  currency  is  often  issued  during  periods 
of  financial  stringency? 

12.  What  is  the  nature  of  the  usual  organization  of  a 
savings  bank? 

13.  What  is  the  usual  cause  of  financial  panics? 

14.  What  qualifications  are  desirable  in  the  employees  of 
a  bank? 


CHAPTER  IV 

Deposits  and  Depositors 

Section  79.  Opening  a  Bank  Account. — When 
you  enter  a  bank  to  open  an  account,  inquire  for  the 
cashier  or,  in  the  case  of  a  large  banlv,  the  person  in 
charge  of  new  accounts;  and,  if  possible,  take  with 
you  some  one  who  can  introduce  you  and  identify 
you  as  the  person  you  profess  to  be. 

If  you  go  alone,  do  not  feel  hurt  if  a  number  of 
pertinent  questions  are  asked  you.  While  you  may 
be  perfectly  honest,  the  bank  knows  a  large  nmiiber 
of  people  make  their  living  by  their  wits,  so-called; 
and,  besides,  it  is  necessary  to  establish  those  con- 
fidential relations  which  ought  to  exist  in  all  finan- 
cial transactions  so  that  the  banker  may  know 
something  more  about  you  than  he  could  ascertain 
by  merely  looking  at  you,  and  taking  your  name  in 
a  book. 

The  cashier  or  other  officer  will  have  you  place 
your  signature  on  a  card  or  in  a  book.  Your  name  as 
written  in  this  way  should  be  the  same  in  style  as 
you  intend  to  place  on  your  checks. 

If  necessary,  some  officer  of  the  bank  will  show 
you  how  to  make  out  a  deposit  slip.    He  will  give  you 

77 


78  BANKING,  CREDIT  AND  FINANCE 

also  a  small  bank  book,  in  wMcli  you  will  be  credited 
with  the  amount  of  money  wliich  you  deposit.  Each 
time  you  deposit  money  you  will  be  required  to  make 
out  a  deposit  slip.  The  banks  furnish  the  printed 
blanks  free. 

§  80.  Deposit  and  Withdrawal. — Your  bank  book 
is  your  only  receipt  from  the  bank  for  the  money  you 
deposit.  When  you  deposit  money,  hand  it  to  the 
receiving  teller  with  the  funds  and  deposit  slip;  and 
when  you  wish  to  draw  money,  present  your  check 
to  the  paying  teller. 

When  you  wish  to  have  your  bank  book  balanced, 
hand  it  to  the  receiving  teller.  This  is  usually  done 
on  the  first  of  each  month.  The  paid  or  canceled 
checks  are  returned  to  you  in  a  day  or  two  when  you 
get  your  bank  book  back.  These  should  all  be  tiled 
in  an  orderly  way.  They  serve  as  vouchers  and  may 
be  useful  in  legal  complications. 

§  81.  Depositors'  Monthly  Statement. — Most  of 
the  city  banks  now  furnish  depositors  with  a  monthly 
statement  of  their  account,  showing  in  detail  the 
amount  of  all  deposits  and  checks  paid,  also  the  bal- 
ance remaining  to  the  depositor's  credit  on  the  last 
day  of  the  month.  The  paid  or  canceled  checks  are 
returned  with  this  statement  on  about  the  first  of 
each  month;  and  where  this  system  is  followed  it  is 
not  necessary  to  present  the  bank  book  in  order  to 
have  it  balanced,  for  the  bank  book  shows  only  the 
amount  of  deposits  and  answers  no  other  purpose 
than  a  receipt. 

§  82.  Arranging  the  Deposits. — Do  not  wait  until 
you  get  to  the  bank  to  coimt  your  money,  or  to  in- 


DEPOSITS  AND  DEPOSITORS  79 

dorse  your  checks  and  arrange  your  deposit.  This 
should  be  done  before  you  go  to  the  bank,  or  at  least, 
before  you  present  yourself  at  the  receiving  teller's 
window.  Be  sure  that  you  have  the  figures  correct. 
Place  the  bills  all  one  way,  right  side  up.  Separate 
your  gold  and  silver,  and  sort  the  silver  by  denomina- 
tions. 

Do  not  deposit  dimes,  nickels,  and  pennies  until 
you  have  a  certain  amount  of  them,  say  five  dollars 
of  each ;  then  put  them  in  a  package,  with  the  amount 
and  your  name  marked  on  it,  and  leave  for  the  teller 
to  count  at  his  leisure,  with  the  understanding  that 
if  short  or  over  the  proper  correction  will  be  made. 

§  83.  Bank  Checks. — ^A  check  is  an  order  for 
money  by  one  who  has  funds  in  the  bank,  payable 
on  demand.  It  is  in  reality  a  sight  draft  on  the  bank. 
Banks  provide  blank  checks  for  their  customers, 
and  it  is  a  very  simple  matter  to  fill  them  out 
properly.  In  writing  in  the  amount  begin  at  the 
extreme  left  of  the  line.  Remember  that  if  a  poorly 
w^ritten  check  should  fall  into  the  hands  of  a  fraudu- 
lent receiver,  who  might  alter  its  wording  '^nd 
figures  and  then  get  the  check  cashed,  the  maker, 
and  not  the  bank,  would  become  responsible  for  the 
loss.  You  cannot  hold  the  bank  responsible  for  your 
carelessness.  A  check  was  raised  from  $100  to  $190 
by  writing  "and  ninety"  after  the  words  "one 
hundred."  One  of  the  ciphers  in  the  figure  was 
easily  changed  to  a  "9"  by  adding  a  tail  to  it.    It 

is  wise  to  draw  a  running  line 

after  the  amount  in  words,  thus  preventing  a>'y 
additional  writing. 


80  BANKING,  CREDIT  AND  FINANCE 

Checks  should  be  dated,  but  the  absence  of  a  date 
does  not  warrant  a  bank  in  refusing  to  cash  the 
check.  iSTotes  made  and  executed  on  Sunday  are 
invalid,  but  a  check  so  dated  is  good. 

The  signature  should  be  in  your  usual  style  fa- 
miliar to  the  paying  teller. 

A  check  is  an  order  on  a  bank,  and  need  not  neces- 
sarily be  written  in  the  prescribed  form.  Such  an 
order  written  on  a  sheet  of  note-paper  with  a  lead 
pencil  might  be  in  every  way  a  legally  good  check. 

If  it  is  necessary  at  any  time  to  write  a  check  for 
a  fractional  part  of  a  dollar,  as  75cts.,  write  '^Seventy- 
five  Cents,"  and  draw  your  pen  through  the  printed 
word  Dollars. 

There  hangs  in  the  office  of  the  Pacific  Mills, 
Boston,  the  canceled  check  of  the  United  States  for 
one  cent;  and  on  the  walls  of  the  Bank  of  Conmierce, 
New  York  City,  hangs  a  handsomely  framed  check 
for  $14,000,000,  signed  by  the  well-known  banking 
house  of  Kidder,  Peabody  &  Co. 

Usually  checks  should  be  drawn  *'to  order."  The 
words,  "Pay  to  the  order  of  John  Brown"  mean  that 
the  money  is  to  be  paid  to  John  Brown  or  to  any 
person  he  orders  it  to.  If  a  check  is  drawn  "Pay  to 
Bearer,"  any  person,  that  is  the  bearer,  can  collect 
it.  The  paying  teller  may  ask  the  person  cashing  the 
check  to  write  his  name  on  the  back,  simply  to  have 
it  for  reference. 

In  writing  and  signing  checks  use  good  black  ink 
and  let  the  copy  dry  a  little  before  a  blotter  is  used. 

§  84.  Safety  Devices  for  Checks. — Safety  devices 
to  prevent  the  fraudulent  alteration  of  checks  are  of 


DEPOSITS  AND  DEPOSITORS  81 

almost  endless  variety,  but  there  has  hardly  been  a 
preventive  against  forgery  and  alterations  yet  in- 
vented which  has  not  been  successfully  overcome  by 
swindlers.  Machines  for  punching  out  the  figures 
are  in  conmion  use,  but  the  swindler  has  successfully 
filled  in  the  holes  with  paper  pulp  and  punched 
other  figures  to  suit  his  purposes.  Some  of  the  lat- 
est devices,  however,  are  ingenious  and  probably 
hard  to  beat. 

The  method  adopted  by  the  express  company  and 
by  the  post  office  department  in  its  money  orders  is 
perhaps  the  best  plan  yet  offered  to  prevent  the 
raising  of  the  amount  of  a  check  or  order.  A  glance 
at  an  express  money  order  wall  illustrate  this  point. 
Notice  the  printed  line  on  the  left  end — ''Not  pay- 
able for  more  than  One  Dollar''  or  *'Five  Dollars,"  as 
the  case  may  be.  To  raise  such  an  order  it  would  be 
necessary  to  add  to  the  length  of  the  paper,  which  of 
course  w^ould  be  impossible. 

The  most  experienced  bankers  favor  a  plain  black 
and  w^hite  check,  drawn  upon  clear  white  paper  with 
good  strong  black  ink. 

§  85.  When  Figures  and  Words  Disagree. — There 
are  often  presented  to  banks  for  payment,  checks 
in  which  the  figures  in  the  margin  do  not  correspond 
wdth  the  amounts  stated  in  writing  in  the  body  of 
the  checks.  The  law  governing  cases  of  this  sort  pro- 
vides distinctly  that  the  amount  in  writing  shall  be 
considered  correct.  If  the  amount  of  money  involved 
w^ere  large,  the  paying  teller  would  be  justified  in 
withholding  payment  until  he  satisfied  himself  that 
the  amount  in  writing  was  what  the  maker  really 
intended  the  check  to  call  for. 


82  BANKING,  CREDIT  AND  FINANCE 

§  86.  Identification  of  Check-Holders. — The  banks 
of  the  United  States  makes  it  a  rule  not  to  cash  a 
check  that  is  drawn  payable  to  order,  unless  the 
person  presenting  the  check  is  known  at  the  bank — 
or  unless  he  satisfies  the  paying  teller  that  he  is 
really  the  person  to  whom  the  money  is  to  be  paid. 
It  must  be  remembered,  however,  that  a  check  drawn 
to  order  and  then  indorsed  in  blank  by  the  payee  is 
really  payable  to  bearer,  and  if  the  paying  teller  is 
satisfied  that  the  payee's  signature  is  genuine  he 
will  not  likely  hesitate  to  cash  the  check.  In  Eng- 
land, all  checks  apparently  properly  indorsed  are 
paid  without  identification. 

In  drawing  a  check  in  favor  of  a  person  not  likely 
to  be  well-known  in  banking  circles,  write  his  address 
or  his  business  after  his  name  on  the  face  of  the 
check.  For  instance,  if  you  write  the  check  to  John 
Smith,  Boston,  it  may  possibly  fall  into  the  hands  of 
the  wrong  John  Smith;  but  if  jon  write  the  check 
in  favor  of  *' John  Smith,  849  Tremont  St.,  Boston," 
it  is  more  than  likely  that  the  right  person  will 
collect  it. 

If  you  wish  to  get  a  check  cashed  where  you  are 
unknown,  and  it  is  not  convenient  for  a  friend  who 
has  an  account  at  the  bank  to  go  with  you  for  the 
purpose  of  identification,  ask  him  to  place  his  sig- 
nature on  the  back  of  your  check,  and  you  will  not 
likely  have  trouble  in  getting  it  cashed.  By  placing 
his  signature  on  the  back  of  the  check  he  guarantees 
the  bank  against  loss.  A  bank  is  responsible  for  the 
signatures  of  its  depositors  but  it  cannot  be  supposed 
to  know  the  signatures  of  indorsers.  The  reliable 
identifier  is  in  reality  the  person  who  is  responsible. 


DEPOSITS  AND  DEPOSITORS  83 

§  87.  Check  Indorsements. — In  indorsing  checks 
note  the  following  points : 

(a)  Write  across  the  back — not  lengthwise. 

(b)  If  your  indorsement  is  the  first,  write  it  an 
inch  or  two  from  the  top  of  the  back;  if  it  is  not  the 
first  indorsement,  write  immediately  under  the  last 
indorsement. 

(c)  Don't  indorse  wrong  end  up;  the  top  of  the 
back  is  the  left  end  of  the  face. 

(d)  Write  your  name  as  you  are  accustomed  to 
write  it,  no  matter  how  it  is  written  on  the  face. 
There  is  a  modern  tendency  to  make  the  indorse- 
ment agree  in  all  respects  with  the  name  of  the  payee 
as  WTitten  on  the  face,  but  the  practice  of  changing 
one's  signature  to  confomi  with  the  whim,  the  care- 
lessness or  the  error  of  another,  is  not  to  be  recom- 
mended. The  bank  knows  your  regular  signature, 
If  you  wish,  however,  you  can  first  indorse  the  check 
^^^.th  your  name  as  written  on  the  face,  then  write 
your  usual  signature  below. 

(e)  If  you  are  depositing  the  check,  write  or 
stamp  "For  Deposit"  over  your  signature.  This  is 
hardly  necessary  if  you  are  taking  the  check  yourself 
to  the  bank.  A  check  with  a  simple  or  blank  indorse- 
ment on  the  back  is  payable  to  bearer,  and  if  lost,  the 
finder  might  succeed  in  collecting  it,  but  if  the  words 
*'For  deposit"  appear  over  the  name,  the  bank  offi- 
cials understand  that  the  check  is  intended  to  be  de- 
posited, and  they  will  not  cash  it. 

(f )  If  you  wash  to  make  the  check  payable  to 
some  particular  person  by  indorsing,  write  *'Pay  to 
(Name) or  order,"  and  underneath 


84  BANKING,  CREDIT  AND  FINANCE 

this  write  your  own  name  as  you  are  accustomed  to 
sign  it. 

(g)  Do  not  carry  around  indorsed  checks  loose- 
ly. Such  checks  are  payable  to  bearer,  and  may  be 
collected  by  anyone. 

(h)  If  you  receive  a  check  which  has  been  trans- 
ferred to  you  by  a  blank  indorsement,  and  you  wish 
to  hold  it  a  day  or  two,  write  over  the  indorsement 
the  words  "Pay  to  the  order  of (yourself) 


This  is  allowable  legally.  The  check  cannot  be  col- 
lected until  you  indorse  it. 

(i)  An  authorized  stamped  indorsement  is  as 
good  as  a  written  one.  Whether  such  indorsements 
are  accepted  or  not  depends  upon  the  regulations  of 
the  clearing-house  in  the  particular  city  in  which 
they  are  olf ered  for  deposit.  In  New  York  City  and 
Chicago  the  use  of  stamped  indorsements  is  univer- 
sal. The  written  indorsement  is  safer  for  trans- 
mission of  out-of-town  collections. 

(j)  If  you  are  indorsing  for  a  company,  or  soci- 
ety, or  corporation,  write  first  the  name  of  the  com- 
pany and  then  your  own  name  followed  by  the  word 
"Treas.'' 

(k)  If  you  have  power-of-attorney  to  indorse  for 
some  particular  person,  write  his  name  followed  by 
your  own,  foUoAved  by  the  word  "Attorney"  or 
"Atty."  as  it  is  usually  written. 

(1)  Where  checks  are  sent  out  by  the  receiving 
(deposit)  bank  to  all  parts  of  the  country  for  collec- 
tion, it  is  customary  for  the  bank  to  stamp  upon  the 
back  of  the  check  the  words  "Indorsement  Guaran- 


DEPOSITS  AND  DEPOSITORS  85 

teed/'  Sometimes  a  check  readies  a  bank  through 
responsible  parties,  who  are  not  its  j)ayees,  without 
bearing  the  payee's  indorsement.  The  bank  may  de- 
cide to  pay  without  demanding  the  absent  indorse- 
ment, since  such  a  demand  would  cause  considerable 
delay  and  trouble,  if  the  presenter  or  the  presentee 
of  the  check  guarantees  the  absence  of  the  indorse- 
ment. This  he  does  by  writing  "Absence  of  indorse- 
ment guaranteed,"  with  his  signature,  on  the  back 
of  the  check.  Of  course,  this  is  practically  a  guaran- 
tee against  loss  and  trouble  to  the  banker,  which 
might  result  from  the  absence  of  the  indoreement. 
The  banks  of  some  cities  will  not  accept  such  guaran- 
tee.    It  is  sometimes  ptennissible  to  indorse  the 

payee's  name  "by (your  own  name) " 

This  may  be  done  by  a  junior  member  of  a  concern 
when  the  person  authorized  to  indorse  checks  is 
absent,  and  the  checks  are  deposited  and  not  cashed. 
If  a  check  lacks  the  indorsement  of  the  original 
payee,  it  may  be  wise,  if  convenient  to  do  so,  to  get 
it  certified  before  sending  it  back  for  such  indorse- 
ment. 

(m)  Write  your  check  payable  to  the  order  of 
some  person,  but  don't  write  "Pay  to  the  order  of 
James  Johnson,  for  grocery  bill,  April,  1922."  Such 
information  on  a  paid  check  may  serve  some  purpose 
of  yours,  but  it  is  not  good  business.  Descriptive 
and  qualifying  matter  is  quite  proper  in  a  letter 
accompanying  the  check,  and  if  the  letter  has  been 
duplicated  it  is  just  as  legally  valuable. 

(n)  Do  not  write  any  unnecessary  information 
on  the  back  of  your  check.  A  story  is  told  of  a 
woman  who  received  a  check  from  her  husband,  and 


86  BANKING,  CREDIT  AND  FINANCE 

when  cashing  it  wrote  ''Your  loving  wife"  above 
her  name  on  the  back. 

§  88.  Cashing  Your  Own  Check. — If  you  wish  to 
draw  money  from  your  own  account,  the  most  ap- 
proved form  of  a  check  is  written  "Pay  to  the  order 
of  Gash."  This  differs  from  a  check  drawn  to 
"Bearer."  The  paying  teller  expects  to  see  your- 
self or  some  one  well-known  to  him  as  your  repre- 
sentative, when  you  write  "Cash,"  or  else  he  laiows 
that  you  have  cashed  it  yourself  with  some  third 
party  to  whom  you  are  known.    If  you  vn:ite  "Pay  to 

the  order  of (your  ow^n  name)  " 

you  will  be  required  to  indorse  your  own  check  before 
you  can  get  it  cashed. 

§  89.  Checks  for  Special  Purposes. — ^If  you  wish 
to  draw  a  check  to  pay  a  note,  to  draw  money  for 
wages,  or  to  pay  a  draft  which  you  are  buying,  the 
custom  is  to  make  the  check  payable  to  the  particu- 
lar bank  with  which  you  are  dealing. 

§  90.  No  Funds. — If  you  have  deposited  a  check 
and  it  is  returned  through  your  bank  marked  "No 
Funds"  or  N.  S.  F.  (not  sulficient  funds),  it  signifies 
that  the  check  is  worthless  and  that  the  person  upon 
whose  account  it  was  drawn  has  no  funds  or  insuffi- 
cient funds  to  meet  it.  Your  bank  will  charge  the 
amount  to  your  account. 

The  best  thing  to  do  in  such  a  case  is  to  hold  the 
check  as  evidence  of  the  debt  and  write  the  person 
who  sent  it  to  you  giving  particulars  and  asking 
for  an  explanation.  There  is  no  advantage  in  having 
the  check  protested  unless  it  has  an  indorser  other 
than  yourself.  One  of  the  banker's  journals  gives 
an  instance  of  a  maji  who  had  a  check  for  $900,  which 


DEPOSITS  AND  DEPOSITORS  87 

he  took  to  get  cashed.  He  learned  that  the  drawer 
had  only  $700  on  deposit,  and  kno\Ying-  that  he  (the 
drawer)  was  embarrassed  financially,  the  man  de- 
posited to  the  drawer's  credit  $200  of  his  own  money, 
and  then  presented  his  $900  check  and  had  it  cashed, 
holding  the  drawer  liable  for  the  $200. 

§  91.  Stopping  Payment. — If  you  wish  to  stop 
the  check  which  you  have  issued,  you  should  notify 
the  bank  at  once,  giving  full  particulars  of  the  check. 
Its  payment  will  then  be  refused  by  the  bank. 

§  92.  Canceling  Checks. — Banks  have  a  custom, 
after  paying  and  charging  checks,  of  canceling  them 
by  punching  or  by  making  some  cut  through  their 
face.  These  canceled  checks  are  returned  to  the 
makers  at  the  end  of  each  month,  as  before  stated. 

§  93.  Checks  Presented  After  Death. — As  a 
general  rule  banks  are  expected  to  stop  the  payment 
of  a  check  the  signer  of  which  has  died  before  its 
presentation.  This  is  not  always  possible,  for  the 
reason  that  information  as  to  the  death  of  a  customer 
may  not  reach  the  bank  for  days,  so  that  in  reality 
banks  are  every  day  paying  checks  of  men  who  are 
dead.  In  Massachusetts,  checks  are  good  for  ten 
days  after  the  death  of  the  signer. 

§  fL.  Checks  Should  Be  NXmibered. — Checks 
should  be  numbered  so  that  each  can  be  accounted 
for.  The  numbers  are  for  your  convenience  and 
not  for  the  convenience  of  the  bank.  It  is  important 
that  your  check-book  be  correctly  kept,  so  that  you 
can  tell  at  any  time  how  much  money  you  have  in 
the  bank. 


88  RANKING,  CREDIT  AND  FINANCE 

At  the  end  of  each  month,  youi*  bank  book,  if  bal- 
anced, or  your  monthly  statement  may  (and  usually 
does)  show  a  larger  balance  than  your  check-book. 
You  vnll  understand  by  this,  if  both  have  been  cor- 
rectly kept,  that  there  are  checks  outstanding  which 
have  not  yet  been  presented  at  your  bank  for  pay- 
ment. You  can  find  out  which  these  are  by  checking 
over  the  paid  checks  that  have  been  retm'ned  to  you 
with  your  bank-book  or  statement.  The  unpaid 
checks  may  be  presented  at  any  time,  so  that  your 
actual  balance  is  that  shown  by  your  check-book. 

Checks  should  be  presented  for  payment  as  soon 
after  date  as  possible. 

§'  95.  CertijB.cate  of  Deposit. — ^If  you  deposit 
money  temporarily  in  a  bank  for  safekeeping  you 
will  receive  a  receipt  therefor.  This  receipt  is 
usually  called  a  certificate  of  deposit.  Interest  is 
allowed  under  certain  conditions.  It  is  practically 
a  bank's  check  on  itself.  In  issuing  certificates  of 
deposit  to  strangers  the  bank  should  take  their 
signatures  upon  the  margin  of  the  certificate  book, 
so  that,  when  the  certificates  come  home  for  redemp- 
tion, the  indorsement  may  be  compared  with  this 
original  signature,  if  it  seems  necessary.  Of  course 
every  properly  managed  bank  has  a  ledger  account 
of  certificates  of  deposits  issued,  which  is  a  full 
record  of  the  amonnts  and  nunibers.  Returning 
certificates  can  be  compared  with  this  record  as  they 
are  presented  for  payment  through  clearing-houses 
and  over  the  counter. 

§  96.  Certified  Checks. — If  you  wish  to  use  your 
check  to  pay  a  note  due  at  some  other  bank,  or  in 
buying  real  estate,  or  stocks,  or  bonds,  you  may  find 


DEPOSITS  AND  DEPOSITORS  89 

it  necessar}'  to  get  the  check  certified.  This  is  done 
by  an  officer  of  the  bank  who  writes  or  stamps  across 
the  face  of  the  check  the  words  "Certified"  or  "Good 
when  properly  indorsed,"  and  signs  his  name.  The 
amoimt  will  immediately  be  deducted  from  your 
account,  and  the  bank,  by  guaranteeing  your  check, 
becomes  responsible  for  its  payment.  Banks  will 
usually  certify  any  check  drawn  upon  them  if  the 
depositor  has  the  amount  called  for  to  his  credit,  no 
matter  who  presents  the  check.  If  you  should  get 
a  check  certified  and  then  not  use  it,  deposit  it  in 
your  bank,  otherwise  your  account  will  be  short  the 
amount  for  which  it  is  drawn.  In  Canada,  all  checks 
are  presented  to  the  paying  teller. 

§  97.  Bank  Drafts. — Your  bank  check,  while  it  is 
your  sight  draft  on  your  bank,  differs  from  an  ordi- 
nary commercial  draft,  not  only  in  its  wording,  but 
in  its  purpose.  A  check  is  used  for  paying  money  to 
a  creditor,  while  a  draft  is  used  as  a  means  of 
collecting  money  from  a  debtor.  The  bank  is  obliged 
to  pay  your  check  if  it  has  funds  of  yours  sufficient 
to  meet  it,  while  the  person  upon  whom  your  draft 
is  drawn  may  or  may  not  honor  it  at  his  pleasure. 

Banks  keep  money  on  deposit  in  one  or  more  other 
banks  located  in  some  of  the  commercial  centers. 
Nearly  all  large  banks  keep  money  on  deposit  with 
one  or  more  of  the  New  York  City  banks.  They 
call  these  banks  their  New  York  con-espondents. 

A  bank  draft  is  simply  the  bank's  check,  drawing 
on  its  deposit  with  some  other  bank.  Banks  sell 
these  checks  to  their  customers.  Merchants  make 
large  use  of  these  drafts,  or  cashier's  checks  as  they 
are  sometimes  called,  in  making  remittances  from 


90  BANKING,  CREDIT  AND  FINANCE 

one  part  of  the  country  to  another.  These  drafts 
or  checks  pass  as  cash  anywhere  within  a  reasonable 
distance  of  the  money  center  upon  which  they  are 
drawn.  Banker's  drafts  on  New  York  would,  under 
ordinary  financial  conditions,  be  considered  cash  any- 
where in  the  United  States. 

A  draft  on  a  foreign  bank  is  commonly  called  a 
bill  of  exchange.  Bills  of  exchange  are  usually  drawn 
in  duplicate,  one  of  which  is  forwarded  and  the  other 
retained.  They  are  so  worded  that  when  the  original 
is  paid  the  duplicate  becomes  void.  They  are  drawn 
in  the  currency  of  the  country  where  they  are  made 
payable.  These  drafts  are  used  to  pay  accounts  in 
foreign  countries  just  as  drafts  on  New  York  are 
used  to  pay  indebtedness  at  home.  See  chapter  on 
Foreign  Exchange. 

§  98.  "Kiting"  Checks. — Don't  exchange  checks 
to  get  twenty-four  hours'  credit.  This  is  often  done. 
The  banks  call  it  "Kiting."  If  your  bank  finds  that 
kiting  is  included  in  your  business  methods  do  not  be 
surprised  if  you  are  asked  to  withdraw  your  account. 
Banks  cannot  afford  to  lend  you  money  even  for 
twenty-four  hours  without  interest  or  security. 

To  illustrate,  suppose  it  is  12  o'clock  noon — after 
the  bank  clearing  at  the  clearing-house.  A  is  short 
and  needs  $500.  He  gives  B  his  check  for  $500  and 
takes  B's  check  for  $500.  B's  check  may  not  be  any 
better  than  A's,  but  A  deposits  it  and  has  ample  time 
before  three  o'clock  to  draw  on  the  deposit  and  use 
some  of  the  money.  B  may  do  the  same  with  A's 
check.  Other  checks  or  cash  are  deposited  in  the 
morning  before  cleaxing-house  hours  so  that  the 
$500  checks  may  be  met  when  they  come  in  for  col- 


DEPOSITS  AND  DEPOSITORS  91 

lection.  A  may  accomplish  the  same  end  by  having 
accomits  in  two  banlvs  and  by  deposting  a  check  on 
the  one  in  the  other. 

§'  99.  Forged  Checks. — Who  is  liable  when  a 
forged  check  has  been  paid?  This  question  is  often 
asked,  and  the  answer  varies  with  circmnstances. 
Ordinarily  the  bank  must  stand  the  loss,  but  if  the 
fraud  is  the  result  of  carelessness  on  the  part  of  the 
person  whose  name  is  forged,  the  bank  is  not  liable. 
Business  men  vshould  not  only  make  use  of  the  most 
approved  methods  of  protecting  their  checks  but 
they  should  take  every  possible  precaution  to  pre- 
vent improper  use  of  the  blank  forms  by  keej)ing 
them  in  places  inaccessible  to  anyone  but  those  of 
their  owm  counting-rooms  w^ho  are  authorized  to 
write  up  their  checks. 

§  100,  Personal  Signatures. — In  the  course  of 
business  we  often  come  across  very  queer  specimens 
of  writing  and  eccentricities  in  signatures.  A  New 
York  Insurance  Company's  vice-president  had  a  sig- 
nature, as  it  ai)peared  on  the  policies  issued  by  his 
company,  which  was  fourteen  inches  one  way  and 
nine  inches  the  other.  In  our  illustration  the  signa- 
ture at  the  top  of  the  left  is  that  of  F.  S.  Watte, 
teller  of  an  Iowa  bank.  Immediately  under  this 
name  is  that  of  John  Mohr,  Jr.,  cashier  of  a  bank  in 
Indiana.  Under  Mohr's  signature  is  that  of  Tom 
Randolph,  president  of  a  bank  in  Texas.  Directly 
under  Randolph's  signature  w^e  find  a  cross-etching 
w^hich  represents  the  treasurer  of  a  manufacturing 
company  in  Connecticut — ^Hugh  Harbison.  It  ranks 
high  as  a  curiosity  in  penmanship.  The  writing  at 
the  upper  right-hand  corner  is  that  of  Carmon  Parse, 


92 


FANKING,  CREDIT  AND  FINANCE 


casMer  of  a  bank  in  New  Jersey.  The  writing  in  the 
lower  right-hand  comer  filled  the  entii'e  page  of  a 
letter  sheet.  The  name  is  that  of  Jas.  V.  D.  West- 
fall. 


These  specimens  are  interesting,  but  after  all  the 
best  form  of  signatirre,  and  the  one  most  difficult 
to  forge,  is  that  written  in  a  plain  business  style, 
such  as  "John  Johnston"  in  the  illustration. 

Business  men  and  bankers  are  as  thoroughly  fa- 
miliar with  the  signatures  of  other  business  men  as 
they  are  with  their  faces. 


DEPOSITS  AND  DEPOSITORS  93 

§  101.  Suggestions  to  Bank  Depositors. — Don't 
exaggerate  your  financial  condition.  The  bank  has 
a  history  of  it  on  its  books. 

Do  not  borrow  money  to  swell  your  deposits. 

Don't  ask  for  special  favors  in  the  way  of  credit; 
good  security  is  all  the  bank  asks.  Your  intercourse 
with  bank  officers  should  be  candid  and  courteous. 

Make  your  deposit  as  early  in  the  day  as  possible. 
Never  exchange  checks  to  make  large  deposits. 
Never  make  deposits  without  your  bank  book. 
Avoid  unnecessary  conversation  with  the  clerks. 

Make  it  an  invariable  rule  to  give  checks  only  out 
of  your  own  check  book.  Never  give  out  checks 
dated  ahead.  Always  consider  a  check  paid  when 
you  give  it  out  and  mark  the  amount  from  your 
balance. 

Let  all  your  dealings  be  strictly  honorable. 

Do  not  draw  a  check  unless  you  have  the  money 
on  deposit. 

Do  not  test  the  generosity  of  your  bank  by  pre- 
senting, or  allowing  to  be  presented,  your  check  for 
a  larger  sum  than  your  balance. 

Do  not  draw  a  check  and  send  it  to  a  person  out 
of  the  city  expecting  to  make  good  the  amount  be- 
fore it  gets  back. 

Do  not  give  your  check  to  a  friend  \\'ith  the  con- 
dition that  he  is  not  to  use  it  until  a  certain  time. 

Do  not  send  ignorant  and  stupid  messengers  to 
the  bank  to  transact  your  business. 


94  BANKING,  CREDIT  AND  FINANCE 

Questions  for  Review,  Chapter  IV. 

1.  What  course  is  followed  by  a  business  man  in  open- 
ing an  account  in  a  bank  ? 

2.  What  is  the  legal  nature  of  a  bank  check? 

3.  What  is  the  purpose  of  the  depositor's  bankbook? 

4.  Wlio  is  responsible  for  any  loss  in  case  of  the  fraudu- 
lent "raising"  of  a  check? 

5.  Is  a  check  dated  on  Sunday  good? 

6.  Is  a  note  executed  on  Sunday  good? 

7.  Must  a  check  necessarily  be  written  on  a  printed 
form? 

8.  Why  should  a  check  usually  be  drawn  "to  order"? 

9.  Is  it  ever  a  good  plan  to  place  the  address  of  the 
payee  on  the  face  of  a  check? 

10.  What  is  the  correct  method  of  indorsing  a  check? 

11.  How  would  you  write  a  check  to  draw  money  for 
wages  of  employees? 

12.  How  would  you  draw  cash  for  your  own  use? 

13.  If  you  have  power  of  attorney  to  indorse  for  a  person, 
how  do  you  sign  your  name  ? 

14.  Is  a  stamped  indorsement  of  a  check  as  good  as  a 
written  one? 

15.  What   should   be  done   in  case   a  check  is  returned 
marked  "no  funds"? 

16.  How  are  checks  "certified"? 

17.  What  is  meant  by  "kiting"  checks? 

18.  What  is  the  best  form  of  signature  for  a  check,  and 
the  kind  most  difficult  to  forge? 


CHAPTER  V 

Notes  and  Drafts 

Section  102.  Promissory  Notes. — A  promissory 
uote  is  a  written  promise  to  pay  a  specified  smn  of 
money.  At  the  time  of  the  note's  issue,  that  is, 
when  signed  and  delivered,  two  parties  are  con- 
nected with  it :  the  maker  and  the  payee.  The  maker 
is  the  person  who  signs  or  promises  to  pay  the  note, 
and  the  payee  is  the  person  to  whom  or  to  whose 
order  the  note  is  made  payable. 

Negotiable  in  a  commercial  sense  means  trans- 
ferable and  a  negotiable  note  is  a  note  which  can  be 
transferred  from  one  person  to  another.  A  note  to 
be  made  negotiable  must  contain  the  word  order  or 
the  word  bearer,  that  is,  it  must  be  payable  either  to 
bearer  or  to  the  order  of  the  payee. 

A  non-negotiable  note  is  payable  to  a  particular 
person  only. 

A  note  may  be  written  on  any  kind  of  paper  in 
ink  or  in  pencil. 

§  103.  Date  of  a  Note.— The  date  of  a  note  is  a 
matter  of  the  first  importance.  Some  bankers  and 
business  men  now  consider  it  better  to  draw  notes 
and  time  drafts  payable  at  a  certain  fixed  time;  as, 
"I  promise  to  pay  on  the  10th  of  March,  19 — —.''* 

95 


96  BANKING,  CREDIT  AND  FINANCE 

The  common  custom,  however,  is  to  make  the  notes 
payable  a  certain  number  of  days  or  months  after 
date. 

A  note  made  and  issued  on  Sunday  is  void. 

The  day  of  maturity  is  the  day  on  which  a  note 
becomes  legally  due.  In  most  of  the  states  a  note  is 
not  legally  due  until  three  days,  caUed  days  of  grace, 
after  the  expiration  of  the  time  specified  in  the  note. 

The  words  *' without  defalcation"  are  inserted  in 
Pennsylvania  notes. 

§  104.  "Value  Received." — These  words  are  not 
legally  necessary,  although  they  usually  appear  on 
ordinary  promissory  notes.  Thousands  of  good  notes 
made  without  any  value  consideration  are  handled 
daily. 

The  promise  to  pay  of  a  negotiable  note  must  be 
unconditional.  It  cannot  be  made  to  depend  upon 
any  contingency  whatever.  A  note  made  payable  in 
anything  but  money  is  simply  a  f onn  of  contract  and 
is  not  a  negotiable  instrmnent. 

§  105.  Accoinmodatioii  Paper. — Notes  and  ac- 
ceptances that  are  made  in  settlement  of  genuine 
business  transactions  come  under  the  head  of  reg- 
ular, legitimate  business  paper.  An  accommodation 
note,  is  one  which  is  signed,  or  indorsed,  or  accepted, 
simply  as  an  accommodation,  and  not  in  settlement  of 
an  account  or  in  payment  of  an  indebtedness. 

Accommodation  paper  has  a  deservedly  hard  repu- 
tation with  banks.  However,  there  are  all  grades 
and  shades  of  accommodation  paper,  though  it  rep- 
resents no  actual  business  transaction  between  the 


NOTES  AND  DRAFTS  97 

parties  to  it,  and  rests  upon  no  other  foundation 
than  that  of  mutual  agreement. 

§  106.  Title  of  Third  Parties. — No  contract  is 
good  without  a  consideration,  but  this  is  only  true  be- 
tween the  original  parties  to  a  note.  The  third  party 
or  innocent  receiver,  or  holder  of  a  note,  has  a  good 
title,  and  can  recover  its  value,  even  though  it  was 
originally  given  without  valuable  consideration. 

An  innocent  holder  of  a  note  which  had  been 
originally  lost  or  stolen,  has  a  good  title  to  it,  if  he 
received  it  for  value. 

§  107.  Interest  Notes. — A  note  does  not  draw  in- 
terest until  after  maturity,  unless  the  words  with 
interest  appear  on  the  face.  Notes  draw  interest 
after  maturity  and  until  paid,  at  the  legal  rate. 

§  108.  Indorser  of  a  Note. — An  indorser  of  a  note 
is  any  person  who  writes  his  name  on  the  back  of  it, 
and  by  so  doing  guarantees  its  payment.  Indorse- 
ments on  notes  are  usually  made  in  blank,  that  is, 
without  the  words  '^Pay  to  the  order  of."  The  re- 
ceiver of  the  note  is  then  free  to  indorse  it  or  not  at 
his  pleasure  if  he  wishes  to  transfer  it. 

The  indorser  is  liable  for  its  payment  if  the  maker 
fails  to  meet  it.  If  an  indorser  should  be  compelled 
to  pay  a  note  he  has  a  good  claim  against  the  maker, 
and  against  each  indorser  whose  name  appears  above 
his  own. 

An  indorser  to  whose  order  a  note  is  drawn  or 
indorsed,  can  transfer  it  without  becoming  liable  for 
its  payment  by  writing  the  words  '*  without  recoiu'se" 
before  or  after  his  name  on  the  back. 


98  BANKING,  CREDIT  AND  FINANCE 

A  person  who  receives  a  promissory  note  in  good 
faith  for  fair  value  before  the  day  of  maturity,  takes 
it  free  from  all  defects  of  title  and  from  all  claims 
that  might  be  set  up  against  any  preceding  holder. 
This  is  not  true  of  notes  transferred  after  maturity. 

§  109.  Presentation  for  Payment. — A  note  should 
be  presented  on  the  exact  day  of  maturity.  Notes 
made  payable  at  a  bank  or  at  any  other  place,  must 
be  presented  for  payment  at  the  place  named.  When 
no  place  is  specified  the  note  is  payable  at  the  maker's 
place  of  business  or  at  his  residence. 

The  note  must  not  be  presented  before  or  after 
maturity  but  upon  the  exact  day  of  maturity,  if 
the  indorsers  are  to  be  held  liable  for  its  non-pay- 
ment. 

§  110.  Protest. — ^When  a  note  is  presented  for 
payment  at  maturity  and  is  not  paid,  it  is  usually 
protested,  that  is,  a  notary  public  makes  a  formal 
statement  that  the  note  was  presented  for  payment 
and  payment  was  refused.  Notice  of  such  protest  is 
sent  to  the  maker  and  to  each  indorser. 

The  bank  should  never  hand  to  its  notary  smy 
paper  for  protest  until  it  has  made  sure  that  its 
non-payment  has  not  been  brought  about  by  some 
error  or  misunderstanding.  Quite  often,  even  though 
the  paper  has  been  made  payable  at  the  bank,  the  no- 
tary sends  a  messenger  with  the  note  to  the  maker 
to  make  a  formal  demand  for  payment. 

In  taking  a  collection  paper,  banks  shoidd  obtain 
clear  instructions  from  its  owners  as  to  whether  or 
not  it  should  be  protested  in  case  of  non-payment. 
It  by  no  means  follows  that  a  formal  protest  is  not 


NOTES  AND  DRAFTS  99 

desired  because  the  paper  bears  no  indorsements. 
Many  banks  make  it  a  rule  to  protest  all  impaid 
paper  unless  otherwise  ordered. 

§  111.  Date  of  Maturity. — In  finding  the  date 
of  maturity  it  is  important  to  remember  that  when 
a  note  is  drawn  "days  after  date"  the  actual  days 
must  be  counted,  and  when  drawn  "months  after 
date"  the  time  is  reckoned  by  months. 

§  112.  Payment  on  a  Note. — If  a  payment  is  made 
to  apply  on  a  note,  such  payment  should  always  be 
indorsed  on  the  back  of  the  note.  Such  indorse- 
ment requires  no  signature.  Tlie  usual  form  is  to 
give  the  date  and  write  "Received  on  within  note," 
stating  the  amount.  An  ordinary  separate  receipt  is 
not  sufficient.  Each  amount  indorsed  on  the  back 
reduces  the  face  value. 

§  113.  A  Joint  Note. — A  note  having  two  or  more 
makers  is  called  a  joint  note.  If  written  "We  jointly 
and  severally  promise  to  pay,"  either  maker  is  indi- 
vidually liable  for  the  whole  amount  if  the  other 
does  not  pay  his  share;  if  written  "We  promise  to 
pay,"  each  is  liable  for  his  one-half. 

A  note  w'ritten  "I  promise  to  pay,"  and  signed  by 
two  or  more  persons  is  a  joint  individual  note. 

§  114.  Signature  to  a  Note. — The  maker's  signa- 
ture to  a  note  must  appear  in  some  form  upon  some 
part  of  the  paper.  It  may  be  affixed  by  himself  or 
his  authorized  agent,  and  it  may  be  the  full  name 
or  the  initials  only. 

§  115.  Commercial  Drafts. — A  commercial  draft 
is  really  a  letter  from  one  person  to  another  request- 


100  BANKING,  CREDIT  AND  FINANCE 

ing  that  a  certain  sum  of  money  be  paid  to  the  person 
who  calls  or  to  the  bank  or  firm  for  whom  he  is  act- 
ing. Commercial  usages  recognize  a  particular  form 
in  which  this  letter  is  written  and  the  address  of  the 
person  for  whom  it  is  intended  is  usually  written 
at  the  lower  left-hand  corner  instead  of  on  an  en- 
velope. 

Commercial  drafts  are  sent  through  the  banks 
instead  of  directly  through  the  mail.  For  instance, 
if  A  of  Boston  owes  B  of  New  York  $100,  B  may 
draw  on  A  for  the  amount.  He  may  deposit  the 
draft  in  a  New  York  bank  to  be  forwarded  or  he 
may  mail  it  himself  to  a  Boston  bank  for  collection. 
When  the  draft  reaches  the  Boston  bank,  a  messen- 
ger will  carry  it  to  A.  If  it  is  a  sight  draft,  that  is, 
if  B  wants  the  money  paid  at  sight,  immediately,  A 
may  give  the  money  to  the  messenger  and  take  the 
draft  as  his  receipt.  If  it  is  a  time  draft,  that  is, 
if  B  gives  A  time,  a  certain  number  of  days  in  whicli 
to  pay  the  draft,  A  accepts  it.  He  does  this  by  writ- 
ing the  word  accepted  with  the  date  and  his  signa- 
ture across  the  face  of  the  draft.  He  then  returns 
the  draft  to  the  messenger  and  it  is  returned  to  B. 
An  accepted  draft  is  really  a  promissory  note,  though 
it  is  often  called  an  acceptance.  When  a  man  pays 
or  accepts  a  draft  he  is  said  to  honor  it.  In  this 
instance  A  is  not  obliged  either  to  pay  or  to  accept 
the  draft.  It  is  not  binding  on  him  any  more  than 
a  letter  would  be.  But,  if  he  refuses  to  honor  legiti- 
mate drafts,  it  may  injure  his  credit  Avith  the  banks 
and  other  business  houses.  See  chapter  on  Credit  and 
Exchange. 


NOTES  AND  DRAFTS  lOl 

§  116.  Collections  by  Draft. — ^It  is  a  very  com- 
mon thing  to  collect  distant  accounts  by  means  of 
commercial  drafts.  A  debtor  is  more  likely  to  meet 
a  draft  than  he  is  to  reply  to  a  letter  and  inclose  his 
check.  It  is  really  more  convenient  and  safer  too, 
for  there  is  some  risk  in  sending  personal  checks 
through  the  mails.  There  are  some  houses  that  make 
all  their  payments  by  check,  while  there  are  others 
that  prefer  to  have  their  creditors  at  a  distance  draw 
on  them  for  the  amounts  due. 

If  a  business  man  who  is  accustomed  to  honor 
drafts  continues  for  a  period  to  dishonor  them,  the 
banks  through  which  the  drafts  pass  conclude  that 
he  is  unable  to  meet  the  payments.  Circiunstances  of 
this  character  have  a  tendency  to  injure  one's  credit. 

The  messenger  from  a  bank  who  presents  a  sight 
draft  is  not  authorized  to  accept  a  check  in  payment, 
but  the  person  upon  whom  the  draft  is  drawn  may, 
if  he  chooses,  write  across  the  face,  Accepted,  July 
— ,  19 — ,  payable  at  First  National  Bank,"  and  under 
this  write  his  name.  Such  a  draft  is  then  really  a 
check — an  order  on  his  banli  to  pay  the  amount  due 
for  him,  and  the  particulars  must  be  entered  in  the 
check-book  just  the  same  as  though  an  actual  check 
had  been  issued. 

Some  houses  deposit  their  drafts  for  collection  in 
their  home  banks,  while  others  have  a  custom  of 
sending  them  direct  to  some  bank  or  near  the  place 
where  the  debtor  resides.  If  the  place  is  a  very 
small  one  the  collection  may  be  made  through  one  of 
the  express  companies. 


102  BANKING,  CREDIT  AND  FINANCE 

§  117.  Draft  Notices. — When  goods  are  sold  for 
distinct  periods  of  credit  and  it  is  generally  under- 
stood that  maturing  accounts  are  subject  to  sight 
drafts,  there  really  should  be  no  need  of  notifying 
the  debtor  in  advance  of  drawing.  Some  houses, 
however,  make  a  general  custom  of  sending  notices 
ten  days  in  advance  stating  that  drafts  will  be  drawn 
if  check  is  not  received  in  the  meantime.  These  no- 
tices may  be  often  seen  printed  at  the  foot  of  state- 
ments sent  out  on  the  first  of  the  month. 

§  118.  When  are  Accounts  Due? — Custom  has 
toiade  some  rules  which  are  now  considered  absolute 
by  the  business  houses.  On  general  monthly  credit 
accounts,  all  goods  bought  during  the  month  are 
due  on  the  first  day  of  the  month  following  and 
may  be  paid  any  time  between  the  first  and  the 
tenth.  Goods  sold  for  cash  should  be  paid  for  at 
once  or  within  ten  days  from  the  date  of  sale. 

If  a  discount  is  allowed  for  cash  that  discount  can 
be  claimed  and  is  usually  allowed  if  payment  is 
made  within  10  days.  Goods  bought  on  March  3  at 
80  days  would  be  due  April  3  plus  10  days,  or  April  13. 
That  is  to  say,  if  a  discount  were  allowed  for  pay- 
ment within  30  days  the  discount  could  be  claimed 
if  payment  were  not  made  until  April  13. 

It  is  a  common  custom  to  date  sales  ahead,  to  the 
first  of  the  next  month,  or  sometunes  two  or  three 
months  ahead.  The  dates  of  drafts  then  conform  to 
the  general  custom  of  credits. 

§  119.  Collections  Through  Banks. — If  you  de- 
sire to  have  your  bills  receivable,  and  commercial 
drafts  collected  through  a  bank,  you  should  place 


NOTES  AND  DRAFTS  103 

them  with  the  bank  at  least  fifteen  days  before  matu- 
rity. About  ten  days  before  maturity  the  bank  will 
send  to  the  maker  a  formal  notice  stating  that  they 
hold  a  note  against  him,  giving  the  amount  and  date 
of  maturity,  and  asking  him  to  call  and  pay  it. 

When  a  note  is  left  at  the  bank  for  collection,  it 

should  be  indorsed  ''Collected  for  account  of ." 

By  this  indorsement  the  note  is  not  transferred  to 
the  banlv.  The  bank  is  simply  authorized  to  collect 
the  amount. 

§  120.  Three-Party  Draft.— If  the  drawer  of  a 
draft  owes  some  one  in  the  same  city  with  the  person 
upon  whom  he  draws,  that  is,  if  he  has  a  creditor 
and  a  debtor  in  the  same  city,  he  can  draw  on  the 
debtor  in  favor  of  the  creditor  and  forward  the  draft 
by  mail  to  the  creditor.  The  creditor  will  deposit 
it  for  collection  in  the  ordinary  way,  usually  after 
indorsing  it. 

§  121.  *'No  Protest."— We  often  see  attached  to 
the  end  of  the  draft  a  little  slip  with  the  words  "No 
Protest;  tear  this  off  before  presenting."  This  is 
simply  private  advice  to  the  banker  informing  him 
that  the  drawer  does  not  wish  to  have  the  draft  pro- 
tested. It  may  be  that  he  does  not  wish  to  wrong,  or 
injure  the  credit  of,  or  add  to  the  expense  of  his 
debtor,  or  it  may  be  that  he  considers  the  account 
doubtful  and  does  not  wish  to  add  to  his  loss  that 
of  protest  fees. 

§  122.  Discounting  Drafts. — ^It  is  a  common 
thing  to  have  drafts  discounted  before  they  are  ac- 
cepted. For  instance,  a  wholesale  merchant  may 
have  accounts  out  amounting  to  $100,000  and  he 


104  BANKING,  CREDIT  Al<iD  FINANCE 

may  need  immediate  working  capital.  He  draws  on 
his  customers  and  sells  his  drafts  to  a  bank  either 
directly  or  through  a  note  broker.  The  amount  of 
discount  depends  upon  the  money  market.  The 
drafts  are  as  good  as  one-name  notes.  Some  of  them, 
of  course,  will  be  dishonored,  but  these  are  met  by 
the  drawer  as  soon  as  returned,  or  he  may  set  aside 
an  agreed-upon  percentage  of  the  entire  amount  to 
cover  the  drafts  likely  to  be  returned. 

Drafts  attached  to  bills  of  lading  and  other  securi- 
ties are  frequently  discounted  when  placed  in  the 
hands  of  the  bank.  Such  drafts  are  usually  drawn 
at  sight  or  at  one  day. 

§  123.  Advantages  of  Taking  a  Note. — ^It  is  gen- 
erally understood  that  a  debtor  is  more  likely  to  pay 
a  promissory  note  than  he  is  to  keep  a  simple  verbal 
promise.  It  will  injure  his  credit  if  he  allows  his 
paper  to  go  to  protest.  It  is  difficult,  too,  to  dispute 
a  claim  after  a  note  has  been  given  in  settlement. 
The  note  may  also  be  used  by  the  creditor  in  raising 
money  for  his  own  use;  that  is,  he  may  get  it  dis- 
counted— sell  it  to  a  note-broker  or  to  a  bank. 

But  there  are  some  disadvantages.  If  a  note  is 
accepted  from  a  debtor  the  amount  cannot  be  col- 
lected until  the  day  of  maturity  of  the  note.  You 
may  hold  a  note  against  a  debtor,  and  if  your  note 
is  not  due,  you  cannot  by  any  process  of  law  prevent 
your  debtor  from  selling  everything  he  owns  and 
leaving  for  parts  imknown. 

A  note  that  is  overdue  is  in  some  particulars  bet- 
ter than  a  note  not  yet  matured.  An  overdue  note 
draws  interest  at  the  legal  rate  from  the  date  of 


NOTES  AND  DRAFTS  105 

maturity  and  legal  steps  to  collect  it  may  be  taken 
at  any  moment. 

§  124.  Discounting  Paper. — To  discount  a  note, 
or  draft  is  to  sell  it  at  a  discount.  The  rates  of  dis- 
count vary  according  to  the  security  offered,  or  the 
character  of  the  loan,  or  the  state  of  the  money  mar- 
ket. For  ordinary  commercial  paper  the  rates  run 
from  4  to  8  per  cent.  Notes  received  and  given  by 
commercial  houses  are  not  usually  for  a  longer  pe- 
riod than  four  months. 

§  125.  Drafts  and  Bills  of  Lading. — The  use  made 
of  conmiercial  drafts  in  connection  with  bills  of  lad- 
ing is  quite  interesting.  For  instance,  the  live  cattle 
are  paid  for  in  Texas  by  the  proceeds  of  a  draft,  with 
bill  of  lading  attached,  upon  Chicago,  where  they  are 
slaughtered.  Bills  of  lading  for  the  dressed  beef 
shipped  East  are  accompanied  by  drafts  on  New- 
York,  and  the  shipment  per  steamer  to  Liverpool 
or  Glasgow  is  drawn  against,  in  sterling,  upon  Lon- 
don. The  latter  draft  is  sold  to  a  New  York  banker, 
Avho  in  turn  dra^vs  against  it  in  favor  of  merchants 
who  are  buying  foreign  exchange. 

§  126.  Overdue  Paper. — Negotiable  paper,  whether 
made  for  accommodation  or  otherwise,  may  be  trans- 
ferred by  endorsement  and  delivery  or  by  delivery 
alone  either  before  it  has  fallen  due  or  afterward. 
There  is  a  difference,  however,  in  the  liability  at- 
tached to  indorsers,  and  the  value  of  the  paper  may 
be  affected  by  the  defenses  existing  between  the 
original  parties.  It  would  be  well  to  consult  a  law- 
yer before  accepting  overdue  paper,  particularly  if 
it  has  indorsers. 


106  BANKING,  CREDIT  AND  FINANCE 

§  127.  Who  is  a  bona-flde  Holder?— If  the  indor- 
see or  holder  of  a  note  has  no  notice  at  the  time  he 
receives  it,  of  any  facts  or  circumstances  that  would 
prevent  any  of  the  parties  to  the  paper  before  him 
from  recovering  the  whole  amount,  he  is  a  bona-fide 
or  innocent  holder,  and  if  he  has  paid  for  the  note, 
he  is  a  holder  for  value,  and  can  recover  its  full  face. 

An  alteration  or  change  in  some  material  part  of 
a  promissory  note,  by  a  party  to  it,  makes  the  paper 
void  as  regards  all  parties  except  those  who  assent 
to  the  change.    Adding  an  interest  rate  is  a  change, 

g  128.  A  Set-off. — If  a  man  has  a  claim  against 
you  and  you  also  have  a  claun  against  him,  you  call 
your  claim  a  set-off,  that  is  something  to  set  or  cancel 
off  pai-t  or  all  of  his  claim.  Under  ordinary  condi- 
tions it  is  impossible  to  have  a  set-off  against  a  note 
not  in  the  hands  of  the  original  payee. 

§  129.  Notice  of  Non-payment  of  a  Note. — If  the 
note  has  been  discounted  or  is  in  a  bank  for  collec- 
tion, the  bank  will  send  notice  to  the  indorsers  to 
the  effect  that  the  note  has  been  presented  for  pay- 
ment and  payment  w^as  refused.  If  the  note  is  in  the 
holder's  hands  and  payment,  upon  presentation,  has 
been  refused,  the  holder  should  immediately  send 
a  written  notice  to  the  indorser,  if  any,  stating  that 

**a  certain  note  made  by ,  for , 

in  favor  of dated ,"  and  *'by 

you  indorsed' '  was  ''this  day  presented  to 

for  payment,  and  pa^nnent  was  refused."    Such  no- 
tice may  be  sent  by  mail. 

§  130.  A  ''Mark"  Signature. — When  a  man  who 
cannot  write  is  asked  to  sign  a  deed  or  mortgage  or 
other  legal  document,  the  usual  custom  is  to  have 


NOTES  AND  DRAFTS  107 

him  affix  a  cross,  some  one  doing  the  writing  for  him. 
Such  a  signature  should  be  witnessed.  An  indorse- 
ment of  this  kind  is  legal  and  is  quite  common. 
There  are  no  legal  rules  covering  the  shape  of  the 
mark.  The  man's  name  should  be  \\'ritten  around 
or  near  the  mark,  thus:  "Charles  Clark  (X)  his 
mark." 

§  131.  Power  of  Attorney. — To  give  some  one 
else  the  power  to  sign  or  indorse  checks,  notes,  or 
other  important  papers,  is  called  giving  such  a  one 
power  of  attorney,  that  is,  the  power  or  authority  to 
be  your  attorney.  Such  authority  when  given  should 
state  explicitly  what  the  attorney  has  power  to  do. 

The  Post  Office  Department  issues  a  printed  blank 
for  use  by  those  who  wish  to  transfer  to  others  the 
power  to  sign  money  orders. 

Powers  of  this  sort  should  be  filed  with  the  post- 
office  or  bank  interested,  or  should  be  made  matters 
of  public  record  at  the  office  of  the  register  of  deeds. 

§  132.  Return  of  Vouchers. — Banks  usually  re- 
turn to  promisors  and  acceptors  all  the  paper  which 
they  have  collected.  When  you  pay  a  note  or  draft 
you  expect  to  receive  the  canceled  note  or  draft  in 
exchange  for  the  money  which  you  pay.  In  the  same 
way  paid  checks  are  returned  to  the  drawers  of  them, 
at  the  end  of  each  month.  This  rule  is  not  generally 
followed,  however,  between  banks  and  their  corre- 
spondents. 

The  canceled  note  or  draft  which  you  receive 
should  not  be  destroyed.  It  may  serve  as  an  im- 
portant voucher.  A  good  iDlan  is  to  tear  the  signa- 
ture through  the  middle  and  destroy  the  torn-off 


108  BANKING,  CREDIT  AND  FINANCE 

piece.  The  note  is  then  destroyed  as  a  credit  instru- 
ment but  remains  sufficiently  complete  to  serve  as 
a  voucher. 

§  133.  Due  Bills. — A  due  bill  is  an  acknowledg- 
ment and  evidence  of  a  debt.  It  may  be  payable  in 
money  or  in  merchandise.  The  ordinary  form  of 
due  bill  is  not  negotiable. 

§  134.  How  Notes  Differ  from  Other  Contracts. 
— There  are  three  peculiarities  which  distinguish 
promissory  notes  from  ordinary  written  contracts. 

(a)  Notes  are  negotiable. 

(b)  There  is  no  statement  in  a  note  of  considera- 
tion. 

(c)  There  are  no  days  of  grace  allowed  on  ordin- 
ary contracts. 

A  note  must  have  a  clear  promise  to  pay,  without 
any  attached  conditions.  The  time  must  be  certain, 
that  is,  it  must  not  depend  upon  the  happening  of 
some  uncertain  event. 

§  135.  Legal  Tender. — In  making  money  pay- 
ments it  is  necessary  often,  or  if  the  receiver  de- 
mands it,  to  make  pajnnent  in  legal  tender,  that  is, 
in  the  form  of  money  required  by  law.  For  instance 
you  cannot  pay  an  amount  of  $18  in  ten  cent  pieces, 
if  the  creditor  refuses  to  accept,  for  the  reason  that 
silver  coins  of  smaller  denomination  than  one  dollar 
are  legal  tender  only  in  all  sums  not  exceeding  $10. 

§  136.  Note  Brokers. — Merchants  sell  a  great 
many  of  their  notes  in  the  open  market,  that  is,  to 
note  brokers.  The  assistance  of  the  broker  who  han- 
dles commercial  paper  is  a  necessary  and  valuable 


NOTES  AND  DRAFTS  109 

aid  to  the  purchasing  bank.  Most  of  the  paper  pur- 
chased by  New  York  city  banlvs  is  purchased  upon 
the  simple  recouunendation  of  the  note  brokers.  As 
a  rule  these  brokers  simply  transfer  the  paper  with- 
out guaranteeing,  by  indorsement,  its  payment. 
Notes  bought  by  banks  from  note  brokers  without 
their  endorsement  are  held  to  be  guaranteed  by  them 
to  be  all  right,  in  all  points  except  that  which  covers 
the  question  of  whether  they  will  be  paid  or  not. 
The  bank  uses  its  best  judgment  in  taking  the  risk. 

If  the  note  dealer,  in  selling  notes  to  a  bank,  makes 
what  he  believes  to  be  fair  and  honest  representa- 
tions regarding  any  particular  paper,  statements  of 
such  straightforward. type  that  upon  them  no  charge 
of  false  pretenses  can  be  made  to  rest,  he  simply 
guarantees  the  note  genuine  as  to  names,  date 
amount,  etc.,  and  that,  in  selling  it,  he  conveys  a  good 
title  to  the  paper.  As  business  men,  however,  they 
are  very  cautious,  and  are  exceedingly  anxious  that 
the  paper  they  sell  shall  be  paid,  and  as  a  rule  they 
make  good  any  losses  which  gTOAV  out  of  apparent 
misrepresentations  on  their  part. 

§  137.  Single-name  Paper. — The  custom  of  issu- 
ing single-name  paper  has  grown  largely  of  late. 
The  maker  is  the  borrower,  and  the  buyeir  must 
consider  his  personal  credit  when  making  the  pur- 
chase. It  is  estimated  that  tAvo-thirds  of  all  the 
paper  bought  by  'New  York  city  banks  is  single- 
name.  Such  paper  makes  no  pretense  to  be  anything 
else  but  what  it  appears,  a  simple  promise  to  pay, 
and  in  this  it  differs  from  accommodation  paper. 
Genuine  double-name  XDaper  consists  of  notes  given 
in  actual  payments  of  merchandise  sales. 


110  BANKING,  CREDIT  AND  FINANCE 

g  138.  Demand  Collateral  Note. — ^In  the  case  of 
what  is  called  a  demand  collateral  note,  the  bank 
loans  money  payable  on  demand  and  accepts,  say, 
railroad  stock  as  security.  The  stock  is  held  by  the 
bank  until  the  note  is  paid,  and  if  not  paid,  the  stock 
becomes  the  property  of  the  bank. 

§  139.  Waiver  of  Demand  and  Notice. — All  in- 
dorsed demand  notes  held  by  a  bank  should  start 
with  a  waiver  of  demand  and  notice  by  the  indorser, 
since  in  time  (in  some  states  in  60  days)  indorsers 
are  lost — ^unless  a  demand  for  payment  is  made  up- 
on promisors — if  this  precaution  has  not  been  at- 
tended to. 

§  140.  Judgment  Note. — Some  of  the  States  have 
a  fonn  of  promissory  note  called  a  judgment  note. 
In  this  form  of  note  the  maker  confesses  judgment 
if  the  note  is  not  paid  and  authorizes  the  court 
to  take  possession  of  sufficient  of  his  propei'ty  im- 
mediately to  satisfy  the  amount  of  the  claim.  It  is 
really  a  very  severe  form  of  contract  and  should  be 
given  only  under  extreme  conditions. 


Questions  for  Review,  Chapter  V. 

1.  What  is  the  natiire  of  a  promissory  note? 

2.  What  is  meant  by  the  day  of  maturity  of  a  note? 

3.  What  are  "clays  of  grace"? 

4.  Are  the  words  "Value  received"  legally  necessary  on 
a  promissory  note? 

5.  What  is  meant  by  "accommodation  paper"? 

6.  Can  a  third  party  or  innocent  holder  of  a  note  recover 
its  value  even  though  it  was  illegally  given,  without  a  val- 
uable consideration? 

7.  When  does  a  note  draw  interest  before  maturity? 


NOTES  AND   DRAFTS  111 

8.  What  is  the  significance  of  indorsing  a  note? 

9.  What  is  the  object  of  writing  the  words  "Without 
recourse"  before  or  after  an  indorser's  name? 

10.  When  should  notes  be  presented  for  payment? 

11.  What  is  meant  by  "protesting"  a  note? 

12.  What  is  the  form  of  a  protest  notice? 

13.  What  course  should  be  followed  after  a  payment  is 
made  to  apply  on  a  note? 

14.  What  is  the  effect  of  the  indorsement  of  a  partial 
payment  on  the  back  of  a  note? 

15.  What  is  the  nature  of  a  joint  note? 

16.  What  is  the  usual  form  or  a  commercial  draft? 

17.  How  are  commercial  drafts  usually  collected? 

18.  What  is  the  advantage  of  making  collections  by  draft  ? 

19.  When  should  bills  receivable  and  commercial  drafts 
be  placed  with  a  bank  for  collection? 

20.  What  is  meant  by  a  three-party  draft? 

21.  What  is  the  meaning  of  the  slip  with  the  words  "No 
protest"  often  attached  to  the  end  of  a  draft? 

22.  What  are  the  advantages  of  taking  a  note  from  a 
debtor  ? 

23.  What  is  meant  by  discounting  a  note  or  draft? 

24.  How  are  commercial  drafts  used  in  connection  with 
bills  of  lading? 


CHAPTER  VI 

Credit  and  Exchange 

Section  141.  Importance  of  Credit. — It  is  to 
credit  alone  that  we  are  indebted  for  that  immediate 
agent  who  plays  so  important  a  part  in  the  trans- 
action of  business,  whether  it  be  in  causing  supply 
and  demand  to  meet,  or  in  applying  to  the  industry  of 
exchange  the  principle  of  the  division  of  labor  which 
is  so  favorable  to  production. 

Without  credit  this  intermediary  is  impossible  in 
most  industries.  It  gives  birth  to  both  industry  and 
trade.  It  multiplies  the  producing  and  consuming 
povv^er  of  society;  by  facilitating  exchange  it  accel- 
erates and  increases  it. 

In  reality  the  largest  share  of  the  business  of  the 
world  is  done  on  a  credit  basis.  In  many  instances 
the  instruments  of  payment  which  we  call  cash  are 
in  reality  only  promises  to  pay. 

During  the  Middle  Ages  credit  transactions  of 
great  importance  and  on  long  time  were  effected 
without  leaving  the  slightest  trace  in  writing;  and 
even  to  this  day  producers  and  merchants  in  some 
countries  contract  credit  obligations  for  twelve 
months'  time,  without  giving  the  least  evidence  of 
the  debt,  and  that  for  a  very  good  reason — ^very 
frequently  they  can  neither  read  nor  write. 

312 


CREDIT  AND  EXCHANGE  113 

§  142.  Instruments  of  Credit. — When  we  give 
credit  we  give  value  and  wait  for  the  value  we  are  to 
receive  in  return;  but  we  often  cannot  afford  to  do 
this,  so  we  get  some  other  person  to  wait  for  us  by 
giving  him  an  instrument  of  credit  which  we  take 
when  we  deliver  our  goods.  The  person  to  whom 
we  give  the  instrument  of  credit  may  not  be  able 
to  wait  either,  so  he  takes  the  paper  to  the  bank  and 
discounts  it.  It  is  the  business  of  the  bank  to  wait, 
not  the  business  of  the  merchant.  The  latter  should 
keep  his  full  capital  active  every  day  and  every  dol- 
lar he  is  waiting  for  is  inactive  and  is  earning 
nothing. 

On  the  other  hand  the  bank  increases  its  capital 
by  waiting,  for  the  shnple  reason  that  it  charges 
for  waiting  just  as  a  lawyer  charges  for  giving  his 
time  to  his  client. 

But  does  this  increased  circulation  increase  capi- 
tal *?  The  machine  runs  faster  ?.nd  turns  out  more 
work,  but  doesn't  increase  its  size  or  its  intrinsic 
value;  it  is  the  work  that  counts,  not  the  machine. 

§  143.    Development  of  Finp.ncial  Exchange. — In 

early  times  foreign  trade  consisted  in  the  dii'ect 
exchange  of  commodities.  A  caravan  set  out  with 
a  variety  of  manufactured  articles,  across  the  deserts 
of  Arabia  or  Sahara,  and  came  back  with  ivory, 
spices,  and  other  valuable  raw  products  obtained  by 
barter.  In  later  times  the  merchant  loaded  his  own 
ship  and  set  her  forth  on  an  adventure,  trusting  that 
his  shipmaster  would  sell  the  cargo  to  advantage, 
and,  with  the  proceeds,  bring  back  another  cargo 


114  BANKING,  CREDIT  AND  FINANCE 

to  be  sold  to  great  profit  at  home.  Trade  was  thus 
reciprocal,  and  what  we  sent  out  paid  for  what  was 
brought  back. 

Wherever  this  direct  reciprocal  exchange  did  not 
exist  it  was  necessary  to  devise  some  mode  of  trans- 
ferring debts.  To  the  early  Italian  and  Jewish  mer- 
chants we  owe  the  develoi3ment  of  the  use  of  the  cred- 
it instruments  which  have  developed  into  bills  of 
exchange.  As  early  as  the  fourteenth  century  bills 
were  used  under  similar  customs  and  of  about  the 
same  form  as  those  of  the  present  day, 

§  144.  Principles  of  Exchange. — ^In  commerce 
the  term  *' exchange"  is  generally  used  to  designate 
that  species  of  mercantile  transactions  by  which  the 
debts  of  individuals  residing  at  a  distance  from  their 
creditors  are  canceled  without  the  transmission  of 
money.  Among  cities  or  countries  having  any  con- 
siderable intercourse  together,  the  debts  mutually 
due  by  each  other  approach,  for  the  most  part,  near 
to  an  equality. 

There  are  at  all  times,  for  example,  a  number  of 
persons  in  New  York  indebted  to  London,  and  per- 
haps, as  many  persons  in  London  indebted  to  New 
York.  Hence  when  A  of  New  York  wishes  to  make 
a  payment  to  B  of  London,  he  does  not  send  the  actual 
money,  but  he  goes  into  the  market  and  huys  a  bill 
of  exchange  on  London;  that  is,  he  goes  to  a  New 
York  bank,  doing  a  foreign  business,  and 
buys  a  draft,  called  a  bill  of  exchange,  which  is  in 
reality  the  New  York  banl^er's  order  on  his  London 
correspondent,  asking  the  latter  to  pay  the  money 
to  the  person  named. 


CREDIT  AND  EXCHANGE  115 

It  may  be  that  about  the  same  time  some  London 
merchant  who  owes  money  in  New^  Yoriv  goes  to  the 
very  same  London  banker  and  buys  a  draft  on  the 
New  York  bank.  In  this  way  the  one  draft  cancels 
the  other,  and  when  there  is  a  difference  at  the  end 
of  a  week  or  month  the  actual  gold  is  sent  across  to 
balance  the  account. 

Inland  or  domestic  bills  are  commonly  called 
drafts.  Foreign  bills,  that  is  bills  on  foreign  coun- 
tries, are  called  exchange. 

§  145.  Par  of  Exchange. — The  par  of  the  cui- 
rency  of  any  two  countries  means,  among  merchants, 
the  equivalency  of  a  certain  amount  of  the  currency 
of  the  one  in  the  currency  of  the  other,  supposing  the 
currencies  of  the  both  to  be  of  the  precise  weight 
and  purity  fixed  by  their  respective  mints.  Thus, 
according  to  the  mint  regulations  of  Great  Britain 
and  France,  £1  sterling  was  nomially  (before  the 
World  War)  equal  to  25.2  francs,  which  was  said 
to  be  the  par  between  London  and  Paris.  And  the 
exchange  betw^een  the  two  countries  was  said  -to 
be  "at  par"  when  bills  were  bought  and  sold  at 
this  rate;  that  is,  for  example,  when  a  bill  for.  £100 
drawn  in  London  was  worth  2520  francs  in  Paris, 
and  conversely.  When  £1  in  London  bought  more 
than  25.2  fr.,  exchange  was  said  to  be  in  favor  of 
London. 

The  normal  par  of  exchange  between  Great  Britain 
and  the  United  States  prior  to  the  World  War  was 
4.86  2-3,  that  is,  £1  sterling  was  w^orth  $4.86  2-3.  The 
effects  of  the  War  brought  the  exchange  value  of  the 
pound  sterling  down  to  as  low  as  $3.49  and  exchange 


116  BANKING,  CREDIT  AND  FINANCE 

wifh  all  the  European  belligerents  sank  to  a  low  ebb, 
with  prospects  for  slow  recovery. 

Exchange  is  quoted  daily  in  New  York  and  other 
city  papers  at  a  certain  rate  in  dollars  and  cents,  for 
sight  bills  on  London  and  at  a  slightly  lower  rate 
for  sixty-day  bills.  These  are  the  two  common  kinds 
of  bills  usually  bought.  The  sixty-day  bills  bought 
in  New  York  are  as  good  as  cash  when  they  reach 
London,  but  they  are  cashed  at  a  discount  from  their 
face  value,  unless  they  are  held  until  the  date  of  matu- 
rity. 

The  foregoing  statements  explain  in  a  general  way 
the  meaning  of  the  par  of  exchange,  but  its  exact 
determination,  or  the  ascertaining  of  the  precise 
equivalency  of  a  certain  amount  of  the  currency  of 
one  country  in  the  currency  of  another,  is  exceedingly 
difacult.  If  the  standard  of  one  be  gold  and  that  of 
another  be  silver,  the  par  must  necessarily  vary  with 
every  variation  in  the  relative  values  of  these  metals. 
The  value  of  the  precious  metals  even  in  contiguous 
countries,  is  always  exposed  to  fluctuations  from  the 
over-issue  or  withdrawal  of  paper,  from  circum- 
stances affecting  the  balance  of  payments.  Gold  is 
usually  high  when  there  is  a  demand  for  gold  or  a 
scarcity  of  it,  just  as  it  is  in  the  case  of  potatoes 
or  wheat.  It  is  obvious,  therefore,  that  it  is  all  but 
impossible  to  say,  by  merely  looking  at  the  mint 
regulations  of  any  two  or  more  countries,  and  the 
prices  of  bullion  in  each,  w^hat  is  the  par  of  ex- 
change  between  them. 

§  146.  The  Test  of  Exchange. — The  imports  and 
exports  of  bullion  are  the  real  test  of  exchange.  If 
buSlion  is  stationary,  neither  flowing  into  nor  out 


CREDIT  AND  EXCHANGE  117 

of  a  country,  its  exchanges  may  be  truly  said  to  be 
at  par;  and,  on  the  other  hand,  if  the  bullion  is  being 
exported  from  a  coimtry,  it  is  proof  that  the  ex- 
change is  against  it,  and  conversely  if  there  be  large 
importations. 

Variations  in  the  actual  course  of  exchange,  or  in 
the  price  of  bills,  arising  from  circumstances  affect- 
ing the  currency  of  two  countries  trading  together, 
are  nominal  only:  such  as  are  real  grow  out  of  cir- 
cumstances affecting  their  trade.  AATien  each  buys 
of  the  other  commodities  of  precisely  the  same  val- 
ue, their  debits  and  credits  will  be  equal,  and  the 
real  exchange  will  be  at  par.  This  condition  of 
affairs  very  rarely  happens. 

The  cost  of  conveying  bullion  from  one  country 
to  another  forms  the  limit  within  which  the  rise  and 
fall  of  the  real  exchange  between  them  must  be 
confined.  If  a  New  York  merchant  owes  a  debt  in 
London  and  exchange  costs  him,  say  2  per  cent,  and 
the  cost  of  shipping  the  gold  is  only  1  per  cent,  it 
will  be  to  his  advantage  to  pay  the  debt  by  sending 
the  actual  coin  across,  so  that  the  limit  within  which 
trade  fluctuations  may  range  corresponds  to  the  ac- 
tual cost  of  making  remittances  in  cash. 

§■  147.  Eifect  on  Foreign  Trade, — Fluctuations 
in  the  nominal  exchange,  that  is,  in  the  value  of  cur- 
rencies of  countries  trading  together,  have  no  real 
effect  on  foreign  trade.  When  the  currency  is  de- 
preciated, the  premium  which  the  exporter  of  com- 
modities derives  from  the  sale  of  the  bill  drawn  on 
his  correspondent  abroad  is  only  equivalent  to  the 
increase  in  the  price  of  the  goods  exported,  occasion- 
ed by  this  depreciation. 


118  BANKING,  CREDIT  AND  FINANCE 

A  favorable  real  exchange  operates  as  a  duty  on 
exportation,  and  as  a  bounty  on  importation.  It  is 
to  the  interest  of  merchants  or  bankers,  who  deal  in 
foreign  bills  to  buy  them  where  they  can  get  them 
the  cheapest,  and  to  sell  them  where  they  are  the 
dearest.  For  this  reason  it  might  often  be  an  advan- 
tage for  a  New"  York  merchant  to  buy  a  bill  on  Lon- 
don to  pay  a  debt  in  Berlin.  For  instance,  in  the  trade 
between  England  and  Italy  the  bills  drawn  on  Eng- 
land amount  almost  invariably  to  a  greater  sum  than 
those  drawn  on  Italy.  The  bill-merchants,  however, 
by  buying  up  the  excess  of  the  Italian  bills  on  Lon- 
don, and  selling  them  in  France  or  other  countries 
indebted  to  England,  prevent  the  real  exchange  from 
ever  becoming  very  much  depressed. 

§  148.  Changes  in  Exchange  Rates. — Exchange 
is  not  affected  so  much  by  the  balance  of  trade  as 
by  the  balance  of  indebtedness.  Europe  can  con- 
tract debts  in  America  by  the  purchase  of  stocks, 
bonds,  or  other  securities  as  readily  as  by  the  pur- 
chase of  wheat,  cotton,  or  oil,  the  rate  of  foreign 
exchange  being  similarly  affected  no  matter  what 
is  bought.  European  owners  of  American  securities 
when  sending  them  to  America  obtain  the  right  to 
draw  against  American  receivers  of  those  securities. 

One  hundred  shares  of  stock  sent  by  a  London  firm 
to  a  New  York  firm  will  make  as  much  exchange 
against  New  York  as  the  same  value  of  wheat  shipped 
by  a  New  York  firm  to  a  Liverpool  account;  so  that 
the  balance  of  trade,  so  far  as  imports  and  exports  are 
concerned,  may  appear  favorable  and  yet  no  balance 
of  indebtedness  appear.  The  movement  of  merchan- 
dise is  recorded  while  the  movement  of  securities 


CREDIT  AND  EXCHANGE  119 

is  not  recorded.  The  sum  total  of  our  securities  in 
European  hands  is  unknown,  but  prior  to  the  World 
War  it  probably  exceeded  the  amount  of  our  national 
debt  at  that  time. 

The  rate  of  foreign  exchange,  affected  by  trade 
movements  and  by  the  movements  of  securities,  is 
also  affected  by  interest  and  dividend  payments  and 
by  remittances  for  freight  on  importations  of  mer- 
chandise, the  owners  of  vessels  usually  being  for- 
eigners. Our  large  cities  send  annually  to  Europe 
drafts  for  hundreds  of  thousands  of  dollars  to  cover 
interest  on  city  bonds. 

Foreign  exchange  is  affected  too,  by  the  differ- 
ence which  exists  at  any  time  between  the  American 
and  European  market  rate  of  interest.  If  money  can 
be  loaned  at  10  i^er  cent  in  New  York  while  only 
5  per  cent  can  be  obtained  in  London,  there  is  an 
advantage  in  keeping  or  sending  money  there,  the 
difference  in  interest  being  greater  than  the  cost  of 
transportation.  The  fact  of  the  United  States  being 
a  gold  producing  comitry  is  also  important,  for  It 
indicates  that  a  small  annual  export  of  gold  is  to  be 
expected. 

§  149.  Effect  of  Travel,  Etc.— There  is  another 
factor  which  has  a  noticeable  effect,  namely  that 
of  travel.  Thousands  of  wealthy  Americans  travel 
abroad  every  summer  and  the  letters  of  credit  which 
they  carry,  if  not  counter-balanced  by  some  other 
cause,  require  gold  shipments  to  meet  them.  Or- 
dinarily Avhen  the  market  rate  of  demand  exceeds 
normal  it  is  evident  that  foreign  goods  have  been  im- 
ported too  freely,  or  American  goods  are  not  wanted 
abroad,    or    American    securities    find    a    better 


120  BANKING,  CREDIT  AND  FINANCE 

market  here  than  in  Europe,  or  rates  of  interest 
here  are  too  low  to  attract  or  keep  foreign  money, 
or  foreigners  are  short  of  money,  or  there  are  a  great 
number  of  Americans  abroad,  or  we  have  produced 
a  surplus  of  gold,  or  freight  remittances  are  large, 
or  interest  payments  on  securities  owned  abroad  are 
heavy.  And  when  the  market  rate  is  below  normal, 
the  reverse  is  true. 

Of  course  there  are  other  causes,  and  important 
ones  too,  but  those  named  are  the  principal  causes  of 
changes  in  rates  under  normal  trade  conditions 
Eastern  capital  is  extensively  used  in  the  West,  be- 
cause the  people  of  the  West  can  make  a  profit  by 
its  use  in  excess  of  the  interest  and  dividends  sent 
to  its  owners.  For  the  veiy  same  reason,  European 
capital  is  extensively  used  in  the  United  States. 

§  150.    Foreign  Exchange  Rates,  1920. 

Normal              *      Demand  Notes                      High  Low 

4.86— London   4.06%  3.19 

5.18— Paris   10.74  17.15 

5.18— Belgium    5.62  17.51 

5.18— Switzerland   5.46  6.50 

5.18— Italy    13.20  28.81 

40.20— Holland  39.00  29.72 

19.30— Greece  15.15  9.00 

19.30— Spain  19.30  13.18 

26.80— Copenhagen    19.15  13.20 

26.80— Stockholm   22.15  17.70 

26.80— Christiania    20.40  13.15 

51.44— Russia  4.70  .75 

48.66— Bombay    49.00  28.75 

48.66— Calcutta    49.00  28.75 

78.00— Hongkong    106.25  69.00 

..  ..— Pekin    179.00  99.00 

108.32— Shanghai    167.00  91.00 

49.82— Kobe    52.50  47.00 

49.83— Yokohama   52.50  47.00 


CREDIT  AND  EXOHANGE  121 

50.00— Manila  50.00        46.00 

42.44— Buenos  Aires   43.75         34.50 

33.55— Rio   28.00         16.75 

23.83— Germany    3.01  1.01 

20.16— Austria   85  .30 

20.26— Jugo  Slavia    

20.26 — Czecho-Slovakia    

19.30— Belgrade    

19.30— Finland 

19.30 — Roumania    

§•  151.  The  Fall  in  Exchange. — Commenting  up- 
on the  fall  in  exchange,  the  Annalist  of  Jan.  5,  1920, 
said:  ** Never  before  in  the  history  of  finance  has 
the  foreign  exchange  market  performed  as  it  did 
during  the  last  year  (1919) .  Not  even  in  the  feverish 
days  of  the  last  week  of  July,  1914  (just  before  the 
outbreak  of  the  European  war)  was  this  market  so 
utterly  demoralized  as  it  was  in  the  fall  of  last  year, 
when  demand  bills  on  London  sold  at  $3.65%  to  the 
pound  sterling,  francs  at  11.87  and  lire  at  13.60  to  the 
dollar.  Almost  up  to  the  day  of  their  realization  such 
rates  were  regarded  as  totally  impossible.*  *  * 

"When  the  year  (1919)  opened,  all  of  the  allied 
exchanges  were  still  being  stabilized  under  war  time 
provisions.  Sterling  stood  at  $4,753/4  for  demand; 
francs  at  5.451/2  to  the  dollar,  and  Italian  rates  were 
at  6.36.  In  the"'case  of  the  first  two,  those  rates  had 
been  established  in  September  1915,  and  while  francs 
had  fallen  from  the  'pegged'  price  during  the  fol- 
lowing year,  the  market  had  been  brought  back  to 
that  level  when  we  entered  the  war,  in  April,  1917. 

From  the  fall  of  1915  to  the  spring  of  1917  the  sta- 
bilization process  was  attended  to  by  private  banking 
interests  on  this  side,  acting  in  conjunction  with  the 
British  and  French  governments.    Italian  exchange, 


122  BANKING,  CREDIT  AND  FINANCE 

allowed  to  drift  in  the  early  stages  of  the  war,  had 
been  taken  in  hand  shortly  after  our  going  in  by 
the  Italian  Exchange  institute  and  the  division  of 
foreign  exchange  of  the  federal  reserve  board  and 
was  well  under  control  when  1919  opened. 

**The  pegging  arrangement,  however,  was  enor- 
mously expensive,  and  with  the  signing  of  the  armis- 
tice all  of  the  allied  governments  and  the  United 
States  Treasury  began  the  consideration  of  plans 
for  abandoning  it.  This  finally  was  done  in  March  of 
last  year  (1919).  On  March  18  the  French  ceased 
supporting  their  exchanges,  and  two  days  later  the 
British  government,  through  J.  P.  Morgan  &  Co., 
announced  they  had  followed  suit.  Prior  to  that,  on 
Jan.  17,  a  partially  unrestricted  market  had  been 
opened  for  Belgian  francs,  but  here  trading  was  on  a 
restricted  scale,  so  that  there  existed  no  precedent 
for  the  broader  action  and  no  indication  of  what  was 
to  follow. 

**  Immediately  upon  removal  of  official  support, 
all  the  exchanges  started  to  fall.  Before  the  end  of 
March  sterling  was  down  to  $4,571/2;  francs  to  6.03, 
equaling  the  previous  low^  record  for  the  war  period, 
the  lire  to  7.80,  which  was  well  above  the  former 
low  record.  This  decline,  punctuated  by  spasmodic 
rallies,  continued  until  August,  when  sterling  had 
receded  to  $4,121/4,  francs  had  gone  to  more  than 
eight  to  the  dollar  and  lire  were  selling  at  9.66,  about 
on  a  par  with  the  previous  low." 

(The  lowest  figures  reached  in  1919,  quoted  in  the 
first  paragraph  of  the  Annalist  article,  occurred  in 
the  first  half  of  December  1919.) 


CREDIT  AND  EXCHANGE  123 

Note. — The  important  subject  of  Foreign  Exchange 
is  dealt  with  in  greater  detail  in  Chapters  XIII  and 
XIV,  for  the  benefit  of  those  who  wish  to  make  a 
more  thorough  study  of  this  branch  of  the  banking 
business. 

§  152.  Exchange  Terms. — There  are  several 
terms  used  in  connection  with  exchange  which  should 
be  understood.  Bankers'  bills  of  exchange  are  bills 
drawn  by  bankers  on  bankers.  Commercial  bills  are 
those  based  upon  movements  of  merchandise,  and 
drawn  by  merchants.  Documentary  bills  are  those 
which  are  accompanied  by  bills  of  lading.  Normal 
exchange  rates  are  those  quoted  in  newspapers ;  there 
are  lower  or  inside  rates  which  are  made  to  brokers, 
through  whom  most  of  the  buying  and  selling  is 
done. 

§  153.  Domestic  Exchange. — The  principle  of 
domestic  or  local  exchange  is  precisely  the  same  as 
that  described  as  underlying  the  foreign  exchange 
business.  In  foreign  exchange  we  have  to  do  with 
a  mixture  of  dollars  and  sovereigns,  francs,  or  other 
foreign  money.  In  domestic  exchange  we  have  dol- 
lars at  both  ends  of  the  line. 

Suppose  A  of  New  York  owes  B  of  Chicago  $12,000. 
He  buys  a  draft  (banker's  check)  on  Chicago  for  this 
sum  and  mails  it  to  B.  Now  this  draft  will  cost  him 
something  in  addition  to  its  face,  but  it  should  not 
cost  more  than  $12  exchange,  for  the  reason  that  A 
can  take  his  $12,000  in  bills  or  gold  and  express  it 
to  Chicago  for  $12.  If  $12  were  charged  the  rate  of 
exchange  would  be  one-tenth  of  one  per  cent. 


124  BANKING,  CREDIT  AND  FINANCE 

But  suppose  that  at  the  same  time  C  of  Chicago 
has  $8,000  to  send  to  D  of  New  York  and  is  trying 
to  buy  a  draft  in  Chicago.  If  C  keeps  his  money  or 
tu  rns  it  over  to  B,  or  to  B  's  bank,  or  for  that  matter 
to  any  bank,  A  need  not  ship  more  than  $4,000,  for  the 
balance  can  be  turned  over  to  D  in  New  York,  or  to 
D's  bank,  or  to  any  bank.  Now  $4,000  can  be  shipped 
for  $4,  so  that  the  rate  of  exchange  on  a  draft  for 
$12,000,  only  $4,000  of  which  need  be  shipped,  should 
not  be  more  than  one-thirtieth  of  one  per  cent. 

Under  normal  conditions  exchange  should  be 
based  upon  the  cost  of  shipping  the  balances  due 
rather  than  the  gross  amounts  due.  If  Chicago  is 
buying  more  through  New  York  than  New  York  is 
buying  through  Chicago,  it  will  be  necessary  at  regu- 
lar intervals  to  ship  gold  or  bills  from  Chicago  to 
New  York  to  meet  the  differences,  and  when  this 
is  the  trade  condition,  drafts  on  New  York  if  pur- 
chased in  Chicago  will  be  at  a  premium.  Drafts 
bought  in  New  York  on  Chicago  should  be  at  a 
discount,  but  as  a  matter  of  fact,  they  will  be  at  par. 

There  are,  of  course,  many  other  things  which  af- 
fect exchange.  Our  banking  system  is  such  that 
the  condition  of  the  money  market  is  uniform  in  each 
banking  center,  but  these  centers  may  differ  very 
largely  from  each  other,  and  while  in  Boston  the 
banks  might  have  more  money  than  they  could  use, 
the  banks  of  St.  Louis  or  St.  Paul  might  be  unable 
to  meet  the  demand  upon  them. 

§  154.  The  Cost  of  Shipping  Gold.— There  are 
times  when  it  is  to  the  advantage  of  the  banker  or 
merchant  to  ship  gold  to  meet  foreign  debts.  Before 
the  war,  if  sight  bills  on  England  cost  more  than 


CREDIT  AND  EXCHANGE  125 

$4.90  it  was  cheaper  to  ship  gold.  The  following 
figures  give  some  particulars  of  the  cost  of  such 
shipments:  Freight — %  of  one  per  cent.  Insurance 
— Yg  of  one  per  cent.  Abrasion — From  nothing  to  Vg 
of  one  per  cent  on  $20-pieces;  %  per  cent  to  1/4  per 
cent  on  $10-pieces,  and  I/4  P^i'  cent,  to  %  per  cent  on 
$5-pieces. 

The  cost  of  bringing  gold  from  London  to  New 
York  is  the  same  as  the  cost  from  New  York  to  Lon- 
don. The  actual  demand  for  gold  in  either  city  wUl 
affect  its  value  slightly,  and  this  temporary  value 
must  be  ascertained  before  making  close  figures  on 
a  large  transaction. 

§  155.  The  World's  Currencies. — In  addition  to 
the  gold  and  silver  coins,  the  United  States  has  in 
circulation  gold  certificates  in  denominations  of  not 
less  than  $10,  issued  upon  deposits  of  gold;  silver  cer- 
tificates issued  against  standard  silver  dollars  de- 
posited in  the  Treasury;  currency  certificates  issued 
in  denominations  of  not  less  than  $5,000  upon  the  de- 
posit with  the  Treasury,  by  national  banks,  of  Unit- 
ed States  legal  tender  notes;  national  bank  notes  of 
denominations  of  $2  and  upward,  issued  by  banks 
upon  the  deposit  with  the  Treasury  of  United  States 
bonds  and  certificates  of  indebtedness  which  are  held 
as  security  for  the  ultimate  redemption  of  the  notes; 
United  States  notes,  Federal  Reserve  notes,  and 
Federal  Reserve  bank  notes. 

The  currency  of  Great  Britain  in  actual  circula- 
tion includes  the  gold  sovereign  and  half-sovereig-n; 
the  silver  crown,  half-crown,  shilling,  sixpence,  and 
three-pence.  The  paper  money  includes  the  notes  of 
the  Bank  of  England,  the  smallest  denomination  of 


126  BANKING,  CREDIT  AND  FINANCE 

which  is  £5,  the  notes  of  the  Scotch  and  Irish  banks, 
the  smallest  denomination  of  which  is  £1,  and  the 
notes  of  the  joint  stock  and  private  banks. 

The  currency  of  Canada  is  in  form,  at  least,  similar 
to  that  of  the  United  States.  Canada  has  no  gold 
coinage  of  her  own,  but  the  gold  coins  of  the  United 
States  and  Great  Britain  pass  current  and  are  legal 
tender.  The  silver  coins  are  similar  to  those  of  the 
United  States,  except  that  there  is  no  silver  dollar. 
The  notes  issued  under  the  authority  of  the  Do- 
minion are  of  the  denominations  $1,  2  and  $4,  and 
are  redeemable  on  demand  in  gold.  Bank  notes  are 
issued  by  the  chartered  banks  in  denominations  not 
smaller  than  $5.  No  special  security  in  the  way  of 
deposit  of  bonds  is  required,  but  the  notes  in  case 
of  insolvency  are  a  preferred  claim  against  all  the 
assets  of  the  bank,  including  the  double  liability  of 
the  stockholders.  The  aggregate  issue  rarely  ex- 
ceeds 60  per  cent  of  the  paid  up  capital  of  the  bank 
and  must  not  exceed  one  hundred  per  cent. 

The  monetary  system  of  Australia  is  the  same  as 
that  of  Great  Britain. 

British  India  has  a  silver  standard  unit,  the  rupee. 

There  are  gold  coins  in  value  equal  to  five,  ten,  fif- 
teen and  twenty  rupees  respectively.  The  govern- 
ment issues  notes  ranging  in  value  from  five  to  ten 
thousand  rupees  secured  by  deposits  of  gold  and 
silver.  The  money  in  circulation  in  India  exceeds 
one  billion  dollars. 

Germany  has  the  gold  standard  with  the  mark  as 
the  monetary  unit.     The  smallest  gold  coin  is  the 


CREDIT  AND  EXCHANGE  127 

5-mark  piece.  The  silver  coins  are  the  5-inark,  2- 
mark,  1-mark,  i/2-mark,  and  1/5  mark  pieces.  The 
paper  money  includes  treasury  notes  payable  in  gold, 
and  the  bank  notes  of  the  Reichsbank,  an  institution 
with  individual  shareholders,  but  largely  under  the 
control  of  the  government.  The  issue  of  notes  of  less 
denomination  than  100-marks  was  prohibited  prior  to 
the  war,  since  which  there  have  been  large  issues  of 
paper  currency  and  the  mark  has  greatly  depreciated 
in  value. 

The  Latin  Union  which  includes  France,  Belgium, 
Italy,  Switzerland,  and  Greece,  has  now  a  single  gold 
standard  with  the  franc  as  the  monetary  unit.  The 
smallest  gold  coin  is  the  5-franc  piece;  the  silver 
coins  are  the  franc,  the  2-franc,  the  half -franc  and 
the  20-centimes  (one-fifth  of  a  franc).  The  coins 
of  one  country  are  received  at  par  in  the  others. 
France  issues  bank  notes  through  the  bank  of 
France.  Belgium  issues  bank  notes  through  the 
bank  of  Belgiimi,  payable  to  the  bearer  at  sight, 
and  the  individuals  and  the  associations  are  free  to 
issue  bank  notes  on  their  own  responsibility.  Italy 
has  no  state  bank,  but  there  are  in  the  country  six 
banks  which  are  authorized  to  issue  notes  payable 
on  demand.  The  smallest  denomination  is  50-lire. 
Switzerland  has  now  a  state  bank  with  central  offices 
at  Berne  and  branches  throughout  the  country 
Greece  has  three  banks  authorized  to  issue  notes 
on  such  a  very  low  gold  and  silver  reserve  that  for 
many  years  gold  has  been  at  a  premium. 

Spain  has  the  silver  peseta,  equivalent  to  the 
franc,  as  a  monetary  unit.  It  has  the  same  gold  and 
silver  coins  as  the  other  countries  of  the  Latin  Union. 


128  BANKING,  CREDIT  AND  FINANCE 

The  only  bank  of  issue  in  the  country  is  the  bank  of 
Spain,  a  private  institution,  with  certain  govern- 
ment restrictions.  Its  smallest  note  of  issue  has 
the  value  of  25-pesetas. 

The  Scandinavian  Monetary  Union  embraces  Swe- 
den, Norway  and  Denmark.  The  krone  or  crown 
is  the  monetary  unit.  The  gold  coins  are  10-kronen 
the  20-kronen,  and  the  silver  coins  are  the  2-kronen, 
the  krone,  and  the  fractional  currency.  Sweden 
has  a  banli  of  issue  entirely  under  the  control  of 
the  state.  Joint-stock  banks  are  also  permitted  to 
issue  notes  under  restrictions  favorable  to  the  mone- 
tary system.  Norway  has  one  bank  of  issue — a  joint- 
stock  bank  with  the  state  as  principal  shareholder. 
Denmark  issues  notes  through  a  state  bank. 

The  monetary  unit  of  The  Netherlands  is  the 
guilder  or  florin.  The  gold  coins  are  the  10-florin 
and  5-florin  pieces.  The  bank  of  the  Nether- 
lands, situated  in  Amsterdam,  has  the  exclusive  right 
to  issue  notes. 

The  monetary  unit  of  Russia  prior  to  the  revolu- 
tion was  the  gold  ruble  of  100  kopecks. 

The  gold  milreis  is  the  monetary  unit  of  Portugal. 

The  currency  of  China  is  made  from  an  alloy  of 
copper,  iron,  and  tin.  In  all  large  transactions,  silver 
by  weight  is  the  medium  of  exchange,  the  Mexican 
dollar  being  used  in  the  South  and  ingots  called 
shoes,  in  the  North.  There  are  large  numbers  of  pri- 
vate banks  which  issue  notes  upon  their  own  author- 
ity for  local  circulation. 

The  legal  money  of  Japan  is  the  yen  of  100  sen. 


CREDIT  AND  EXCHANGE  129 

The  yen  is  almost  equal  in  value  to  our  silver  dollar. 
Trade  among  Japanese  is  carried  on  to  a  large  extent 
by  paper  money  issued  under  the  authority  of  the 
government. 

Mexico  had  a  silver  standard  until  1905,  when  it 
adopted  the  gold  standard.  The  Mexican  dollar  (el 
peso)  is  the  unit,  and  under  the  name  of  piaster, 
is  the  current  coin  of  several  countries  in  America, 
Asia  and  Africa.  There  are  also  gold  coins  in  circu- 
lation, the  smallest  (1  peso)  being  almost  equal  in 
value  to  our  gold  dollar. 

The  Central  American  States  have  bank  notes, 
but  the  metallic  currency  of  these  republics  is  largely 
Mexican. 

Chile  is  on  a  silver  basis,  so  far  as  specie  is  con- 
cerned. The  real  medium  of  exchange  is  a  depreci- 
ated paper  currency.  The  unit  is  the  peso,  normally 
equal  to  the  5-franc  piece  of  France. 

The  unit  of  the  Argentine  Republic  is  the  same, 
but  of  gold.  The  actual  currency  is  depreciated 
paper  fluctuating  greatly  in  value. 

§  156.  English  Money. — Any  person  may  take 
bar  gold  to  the  extent  of  £20,000  to  the  English  mint 
and  have  it  returned  to  him  in  sovereigns  and  half- 
sovereigns.  The  Bank  of  England  before  the  war 
received  bar  gold  at  £3  17s.  9d.  per  ounce  and  paid  in 
gold  coin.  The  English  sovereign  weighs  123.274- 
grains,  and  is  a  legal  tender  so  long  as  it  does  not 
weiarh  less  than  122.5. 


•■iD^ 


English  silver  and  bronze  coins  are  fiat  money, 
that  is,  their  intrinsic  value  is  materially  less  than 


130  BANKING,  CREDIT  AND  FINANCE 

their  face  value.  The  difference  between  their  token 
value  and  the  real  or  intrinsic  value  is  called  seign- 
iorage and  this  is  a  large  source  of  revenue. 

English  gold  coins  are  a  legal  tender  for  any 
amount;  silver  coins  are  a  legal  tender  for  only  forty 
shillings  or  less,  and  bronze  coins  for  one  shilling 
or  less.  The  gold  is  largely  handled  by  bullion 
brokers. 

The  Bank  of  England  notes  are  very  ordinary 
looking  pieces  -of  white  paper  with  plain  black  print- 
ing, somewhat  larger  in  size  than  those  of  the  United 
States.  The  paper  is  especially  made,  is  very  strong, 
and  is  not  easily  burned.  No  note  is  paid  out  a 
second  time.  Every  check  or  draft  is  paid  in  new 
bills. 

In  sending  bank  notes  by  mail  the  Englishman 
generally  cuts  them  in  halves,  takes  a  careful  record 
of  their  marks  and  numbers,  and  sends  one  of  the 
halves  by  registered  mail,  and  the  other  by  ordinary 
post. 

The  Scotch  and  Irish  banks  have  a  paper  issue  of 
their  own,  and  there  are  joint-stock  banks  and  pri- 
vate stock  banks  that  issue  bank  notes.  These  bank 
notes,  although  they  pass  current,  are  not  legal 
tenders. 

§  157.  *' Crossed"  Checks. — The  crossed  check  so 
common  in  Britain  is  unknown  in  the  United  States. 
It  is  simply  an  ordinary  check  that  has  upon  its 
face  writing  or  marks  which  signify  that  it  must 
be  presented  through  some  other  bank  or  banker; 
and  checks  of  this  description  will  not  be  cashed 


CREDIT  AND  EXCHANGE  131 

if  they  reach  the  bank  upon  which  they  are  drawn  by 
any  other  way.  They  are  absolutely  worthless  for 
presentation  in  the  hands  of  the  wrong  persons. 

The  banks  are  forbidden  by  law  to  cash  such  a 
check  over  the  counter.  The  receiver  of  such  a  check 
must  necessarily  deposit  it.     Our  stamped  words 

"Payable  only  through  the clearing  house 

when  properly  indorsed"  have  nearly  the  same  ef- 
fect. 

Some  houses  say  on  their  billheads  how  checks 
are  to  be  crossed.  When  the  check  is  crossed  simply 
by  two  lines  it  may  reach  the  bank  upon  which  it  is 
drawn,  though  any  bank;  when  it  is  crossed  with  a 
bank's  name,  it  must  reach  the  bank  upon  which  it 
is  drawn  through  the  banker  whose  name  appears 
between  the  crossed  lines.  When  the  drawer  knows 
the  name  of  the  payee's  banker  he  usually  inserts 
it;  otherwise  he  simply  draws  the  lines. 

English  banks  do  not  certify  checks.  Every  check 
must  bear  a  revenue  stamp  no  matter  for  how  small 
an  amount  it  is  drawn. 

§  158.  The  British  Consols.— The  British  con- 
sols are  securities  representing  the  consolidated  debt 
of  England;  the  word  consol  being  an  abbreviation  of 
consolidated.  They  are  quoted  in  the  financial  col- 
umns of  American  newspapers.  Here  is  an  illustra- 
tion: **  Consols  are  unchanged  at  94%  for  cash  and 
94%  for  November  settlement."  The  word  settle- 
ment is  used  as  we  would  use  the  word  account. 
On  the  London  Stock  Exchange,  there  are  special 
settling  days  for  securities  of  all  sorts,  including 
transactions  in  foreign  exchange.     By  "November 


132  BANKING,  CREDIT  AND  FINANCE 

settlement''  it  is  understood  that  the  consols  are 
to  be  paid  for  on  the  November  settling  day. 

§'  159.  Canadian  Money. — Many  Americans  hesi- 
tate to  accept  Canadian  money,  usually  for  the 
reason  that  they  have  difficulty  in  passing  it  and 
partly  from  ig-norance  of  its  security.  The  Canadian 
silver  coins  are  in  reality  of  greater  intrinsic  value 
than  the  corresponding  coins  of  the  United  States, 
for  the  reason  that  they  contain  more  silver. 

The  Canadian  one-dollar  bill,  two-dollar-bill,  and 
four-dollar-bill  are  equal  in  value  to  the  very  best 
security  offered  in  the  United  States,  for  the  reason 
that  they  are  issued  by  the  Canadian  government 
and  are  covered  by  actual  gold  and  silver  in  the 
treasury.  The  exchange  value  of  the  Canadian  dol- 
lar, however,  depreciated  somewhat  after  the  World 
War. 

The  notes  issued  by  the  Canadian  banks  are  al- 
most equally  good. 

The  Bank  of  Montreal  is  one  of  the  largest  and 
strongest  financial  institutions  in  the  world.  It  has 
about  200  branches  in  the  large  cities  and  towns  of 
the  Dominion.  The  Canadian  Bank  of  Commerce 
and  the  Merchants'  Bank  of  Canada  are  also  insti- 
tutions of  splendid  strength. 

No  bank  is  chartered  in  Canada  that  has  not  a 
capital  of  at  least  $500,000.  There  are  in  all  about 
fifty  banks  with  numerous  branches.  These  banks 
issue  notes  of  denominations  of  $5  and  upward,  but 
the  government  regulations  are  so  exacting  that  if 
a  bank  should  fail  the  holders  of  its  notes  would  be 


CREDIT  AND  EXCHANGE  133 

almost  sure  to  receive  their  full  value.    These  banks 
always  pay  out  over  the  counter  their  own  bills. 

Under  the  former  United  States  system,  which 
left  each  bank  so  largely  dependent  upon  the  for- 
tunes of  its  locality,  and  the  business  of  each  locality 
so  entirely  dependent  upon  its  local  banlvs,  it  was  not 
unusual  to  see  mutual  ruin  of  banks  and  business  in 
nmnerous  widely  scattered  localities,  while  the  busi- 
ness of  the  country  as  a  whole  was  sound.  Such 
results  are  impossible  in  Canada.  The  widely 
extended  sj^stem  of  each  of  the  great  banks,  with 
its  branches  in  every  part  of  the  country,  constitutes 
a  sort  of  financial  insurance,  by  which  each  helps 
to  guarantee  the  soundness  of  all;  while  the  Cana- 
dian branch  systems,  interlocking  at  every  town, 
leave  it  simply  impossible  that  any  local  point  of 
the  least  importance  should  for  a  moment  be  lacking 
in  the  most  complete  discount,  currency,  and  other 
banking  facilities,  so  long  as  the  whole  business  of 
the  Dominion  is  not  involved  in  common  ruin.  The 
currency  system  is  elastic  and  always  meets  the  de- 
mands. Panics  for  fear  of  stringency  are  unknown. 
A  run  on  a  bank,  as  it  is  understood  in  the  United 
States,  is  practically  impossible. 

§  160.  Letters  of  Credit. — The  ordinary  letter  of 
credit  is  the  leading  and  usual  instrument  for 
the  use  of  travelers  in  Europe  and  has  now 
become  such  a  common  feature  of  banking  that 
every  one  should  be  familiar  with  its  form  and 
purpose.  The  first  page  of  a  letter  of  credit 
is  the  credit  proper,  authorizing  the  various  corre- 
spondents of  the  bank  issuing  it,  who  are  named  on 
the  third  and  fourth  pages,  or  any  other  banker  to 


134  BANKING,  CREDIT  AND  FINANCE 

wliom  the  letter  may  be  presented,  to  pay  the  holder, 
whose  signature  is  given  on  its  face,  money  to  the  ex- 
tent of  the  amount  named.  The  second  page  shows 
how  the  holder  avails  himself  of  the  advantages  of 
the  letter.  It  gives  the  names  of  the  banks  to  which 
he  presented  his  letter  and  the  amount  paid  by  each. 
With  such  a  letter  a  traveler  can  make  a  trip  around 
the  world  and  not  carry  in  his  pocket  at  any  one  tune 
more  gold  or  silver  or  bills  than  would  be  necessary 
to  meet  immediate  local  expenses. 

When  a  banker  issues  a  letter  of  credit,  the  person 
purchasing  it,  and  who  is  to  use  it  abroad,  places 
his  signature  upon  a  lower  corner  of  the  document  in 
the  banker's  presence.  Other  copies  of  the  signature 
are  left  and  are  forwarded  to  the  leading  foreign 
bankers  drawn  upon.  When  the  person  buying  the 
draft  presents  himself  at  a  London  or  Paris  bank 
with  his  letter  of  credit  and  asks  for  a  payment 
upon  it,  the  banker  asks  him  to  sign  a  draft  on  the 
American  banker  issuing  the  letter,  for  the  amount 
required,  which  amount  is  properly  entered  upon  the 
letter  of  credit  before  it  is  returned  to  the  payee. 
Payment  is  usually  made  upon  the  simple  identifica- 
tion or  comparison  of  signatures. 

If  a  traveler  should  lose  his  letter  of  credit  he 
should  notify  at  once  the  banks  upon  and  by  whom 
it  is  drawn. 

These  letters  are  cash  anywhere.  Almost  any 
banker  in  the  world  will  at  any  time  consider  it  to 
his  advantage  to  buy  a  reliable  dollar  draft  on  New 
York.  Such  drafts  should  sell  at  a  premimn  any- 
w^here. 


CREDIT  AND  EXCHANGE  135 

Questions  for  Review,  Chapter  VI. 

1.  What  is  the  function  of  credit  in  modern  business? 

2.  How  large  a  portion  of  the  business  of  the  world  is 
done  on  a  credit  basis? 

3.  Name  a  modera  instance  of  contract  credit  obliga- 
tions being  exchanged  without  giving  evidence  of  the  debt. 

4.  What  is  the  origin  of  the  credit  instruments  which 
have  developed  into  bills  of  exchange  ? 

5.  When  were  such  bills  first  used,  and  in  what  form? 

6.  What  is  meant  in  commerce  by  the  term  "exchange"  ? 

7.  Give  an  illustration  of  the  convenience  of  exchange. 

8.  What  is  meant  by  the  "par  of  the  currency"  of  any 
two  countries? 

9.  What  is  the  par  of  exchange  between  Great  Britain 
and  United  States? 

10.  What  do  we  mean  when  we  say  that  exchange  is  "in 
favor  of"  London  or  Paris? 

11.  What  causes  fluctuations  in  the  price  of  gold? 

12.  Why  are  the  imports  and  exports  of  bullion  the  real 
test  of  exchange  between  two  countries? 

13.  Under  what  conditions  is  it  advantageous  to  a  New 
York  merchant  to  pay  a  debt  in  London  by  sending  the 
actual  coin  across? 

14.  How  was  exchange  with  European  countries  affected 
by  the  World  War? 

15.  To  what  extent  is  the  rate  of  exchange  affected  by 
the  balance  of  trade? 

16.  Name  some  other  conditions  that  affect  the  rate  of 
foreign  exchange. 

17.  In  what  respects  does  the  principle  of  domestic  ex- 
change differ  from  that  of  foreign  exchange? 

18.  Upon  what  should  the  rate  of  domestic  exchange  be 
based  under  normal  conditions? 

19.  When  is  it  cheaper  to  ship  gold  to  England  than  to 
buy  sight  bills? 

20.  What  facts  tended  to  make  the  city  of  London  the 
financial  center  of  the  world? 

21.  What  is  the  nature  of  a  "crossed"  check? 

22.  What  advantages  are  enjoyed  under  the  Canadian 
banking  system? 

23.  What  is  the  nature  of  a  letter  of  credit? 

24.  How  does  a  traveler  obtain  money  abroad  upon  a 
letter  of  credit? 


CHAPTER  VII 

Bank  Credits 

Section  161.     Facts  Required  from  Borrowers. — 

"The  average  statement  required  by  a  city  bank 
makes  a  borrower  dig  down  to  the  blunt  reality.  He 
may  have  been  deluding  himself,  but  if  he  answers 
the  questions  honestly  he  often  finds  he  must  dis- 
count his  former  estimates  heavily.  "\¥hether  it  is 
your  fomi  of  organization  and  total  of  bills  receiv- 
able, or  the  time  you  arrive  at  the  office  and  the 
church  you  attend — every  fact  counts  with  the  bank. 
The  answer  to  what  it  wants  to  know  is — every- 
thing." 

§  162.  The  Subject  of  Credit.— In  the  year  1892 
there  were  not  more  than  a  half-dozen  credit  depart- 
ments in  as  many  banks  in  the  United  States,  and 
during  the  entire  period  of  the  existence  of  the 
American  Bankers'  Association,  from  1875  until  that 
date,  the  subject  of  "Bank  Credits"  had  never  been 
discussed  in  a  practical  way  by  its  members.  Since 
that  time,  however,  the  subject  has  come  up  for  dis- 
cussion before  many  State  bankers'  associations 
throughout  the  country,  and  the  introduction  of  cred- 
it departments  in  banks  has  become  very  general. 

On  February  9,  1895,  the  executive  connnittee  of 
the  New  York  State  Bankers'  Association  adopted 
resolutions  recommending  to  its  members  ''that  they 

136 


BANK  CREDITS  137 

request  borrowers  of  money  from  their  respective 
institutions  to  give  them  written  statements  over 
their  signatures  of  their  assets  and  liabilities,  in 
such  form  as  the  committee  on  uniform  statements 
of  the  various  groups  might  recommend."  Acting 
upon  these  resolutions,  nearly  all  of  the  groups*  of 
the  New  York  State  Bankers'  Association  adopted 
uniform  statement  blanks,  and  the  example  set  by 
that  association  has  been  followed  by  many  associa- 
tions in  other  states. 

In  1898,  the  National  Association  of  Credit  Men, 
a  large  and  powerful  organization  of  nearly  3,000 
members,  after  a  year's  investigation  of  the  subject, 
adopted  uniform  statement  blanks  which  have  ever 
since  been  widely  employed. 

§'  163.  Uniform  Statement  Blank. — On  September  7, 
1899,  the  American  Bankers'  Association,  in  conven- 
tion assembled  at  Cleveland,  Ohio,  adopted  a  uniform 
property  statement  blank,  to  be  supplied  to  its  mem- 
bers and  thus  placed  the  stamp  of  its  approval  upon 
the  credit  department  for  banks,  at  the  same  time 
instructing  its  secretary  to  set  up  in  his  office  a  model 
department,  and  to  furnish  information  to  its  mem- 
bers regarding  the  work  of  the  same. 

These  efforts  were  practically  the  beginning  of 
credit  research,  and  as  we  trace  the  subject  during 
the  past  following  years  and  note  the  growth  of 
these  methods  and  the  many  difficulties  which  have 
been  overcome,  we  certainly  feel  that  something  has 
been  gained  by  the  agitation  and  discussion  of  bank 
credits,  and  much  good  has  been  accomplished. 


138  BANKING,  CREDIT  AND  FINANCE 

§  164.  Laws  Governing  Credit. — In  an  address 
in  June,  1896,  at  the  organization  of  the  National 
Association  of  Credit  Men,  James  G.  Cannon,  of  the 
Fourth  National  Bank,  New  York  City,  said:  "Credit 
can  hardly  be  classed  among  the  sciences,  and  cer- 
tainly it  cannot  be  said  to  be  an  exact  science,  be- 
cause it  is  not  governed  by  any  definite,  fixed  laws." 
But  years  of  study  proved  to  the  satisfaction  of  this 
great  banker  and  others  that  there  are  certain 
definite,  fixed  laws  governing  credit,  that  there  is,  in 
fact,  a  credit  science,  and  some  of  its  principles,  its 
mechanism,  and  its  guiding  rules  may  now  be  stated, 
in  language  subsequently  employed  by  Mr.  Cannon. 

§  165.  Change  of  Methods. — It  is  evident  to  stu- 
dents of  financial  affairs  that  there  has  been  a  gradual 
change  of  method  in  the  buying  and  selling  of  com- 
mercial paper  from  that  which  obtained  in  former 
times.  Borrowers  no  longer  confine  themselves  to 
one  place,  but  go  where  funds  can  be  produced  to 
the  greatest  advantage.  Merchants  in  the  smaller 
towns  go  away  from  home  to  borrow  money,  and 
bankers  in  smaller  cities  go  away  from  home  to  pro- 
cure investments.  Often  bankers  do  not  feel  that 
they  can  break  the  rate  locally,  but  it  frequently 
happens  that  they  will  send  to  the  large  money 
centers  and  buy  the  paper  of  their  home  merchants 
at  a  lower  rate  than  they  would  feel  that  they  could 
take  the  note  for  direct.  One-eighth  per  cent  will  take 
many  a  business  man  from  home  for  his  accom- 
modation. The  practice  is  growing  for  the  banks 
in  larger  cities  to  buy  commercial  paper  for  their 
correspondents  and  in  the  face  of  these  changes  in 
methods  it  becomes  more  and  more  imperative  for 


BANK  CREDITS  139 

bankers  who  handle  commercial  paper,  and  who  are 
located  in  the  large  money  centers,  to  be  fully  in- 
formed in  the  widest  measure  upon  the  credit  of 
borrowers. 

§  166.  Statements  from  Borrowers. — The  corner- 
stone of  credit  science  may  be  said  to  be  the  requiring 
from  borrowers  of  statements  of  the  conditions  of 
^their  affairs.  This  has  now  become  an  accepted  cus- 
tom in  the  relation  between  banks  and  borrowers  on 
commercial  paper.  It  has  come  to  be  recognized 
that  the  practice  is  of  value  to  both  the  bank  and  the 
borrower,  and  this  may  be  considered  the  reason  for 
its  success.  Furthermore,  the  making  of  statements 
oftentimes  renders  concerns  themselves  aware  of 
weaknesses  in  their  methods  of  operation,  financial 
practices  and  results  of  business.  The  banker,  hav- 
ing a  substantial  interest  in  the  success  of  the  bor- 
rower, may  frequently  give  wholesome  advice  or 
timely  warning  from  his  wide  experience  in  com- 
mercial affairs  and  his  foresight  in  monetary  matters. 

There  is  a  distinct  parallel  in  the  results  that  have 
worked  out  from  the  practice  of  giving  statements, 
to  the  results  with  which  bankers  are  familiar  in 
the  methods  of  the  national  banking  system.  Here 
statements  of  conditions  and  bank  examinations  have 
resulted  in  wise  improvement  in  methods,  in  whole- 
some safeguarding  of  funds,  in  conservative  financ- 
ing, and  in  general  advantage. 

Again,  there  is  a  parallel  in  the  results  which 
have  developed  from  the  mutual  relations  of  manu- 
facturers and  the  factory  mutual  insurance  com- 
panies.  Here  the  companies  called  for  improvements 


140  BANKING,  CREDIT  AND  FINANCE 

in  buildings  and  equipment,  which  have  rendered 
fire  a  remote  contingency.  Whoever  doubts  the  joint 
interest  of  such  a  movement  has  never  experienced 
the  paralyzing  effect  which  a  fire  has  upon  the  affairs 
of  any  concern.  The  statement  of  condition  has  come 
to  stay,  and  is  fundamental  in  credit  matters. 

§  167.  The  Credit  Department. — But  if  the  state- 
ment is  the  foundation  of  the  credit  structure,  the 
credit  department  may  be  considered  to  be  the  super- 
structure. This  division  of  the  bank's  operating 
mechanism  may  be  said  to  be  the  clearing-house  for 
credit  information,  the  headquarters  for  credit  anal- 
ysis, the  storehouse  of  facts  relating  to  those  who 
are  commercial  borrowers  of  the  bank's  money.  The 
credit  men  are  the  watchdogs  of  the  bank's  risks 
and  the  guardians  of  the  investments  made  for  its 
correspondents.  The  department  must  be  manned 
by  its  most  faithful,  reliable,  intelligent,  tactful  men, 
who  must  be  capable  of  infinite  pains,  of  inexhaust- 
ible patience,  and  of  absolute  loyalty.  Their  eyes 
and  ears  must  be  open  to  every  contingency  that  no 
sign  may  go  unheeded.  They  are  compelled  to  walk 
in  the  ruts  of  routine  and  yet  be  pathfinders  con- 
stantly. No  man  who  works  mechanically  will  de- 
velop into  a  successful  credit  man. 

The  credit  department  should  have  an  equipment 
commensurate  with  its  importance-  It  should  be 
the  inner  chamber  in  all  respects.  Recorded  con- 
fidences should  never  be  violated,  and  there  should 
be  no  latchstring  to  this  department.  Its  mechanism 
of  blanks,  files,  vaults,  and  office  fixtures  should  be 
porfectly  adapted  to  its  service,  and  every  means 


BANK  CREDITS  141 

^^^hich  ingenuity  can  devise  should  be  utilized  to 
assist  its  work. 

§  168.    Analysis  of  Statements. — In  our  review 

of  the  credit  science  of  to-day  we  have  noted  the 
universal  custom  of  giving  statements.  We  have 
glanced  over  the  mechanism  provided  for  the  han- 
dling of  these  statements  and  correlated  data,  but  the 
important  feature  of  all  credit  science  is:  What  is 
the  banker's  interpretation  of  these  statements'?  It 
is  clear  that  a  statement  which  is  not  submitted  to 
analysis  is  a  menace;  because,  first,  if  errors  have 
been  made,  if  lack  of  judgment  on  the  part  of  the 
management  of  the  concern  has  been  shown  which 
is  not  brought  to  the  attention  of  the  borrower;  if 
reckless  methods  have  been  indulged  in  or  any  dis- 
honesty has  been  practiced,  the  very  fact  that  a 
statement  has  been  received  and  accepted  by  a  bank- 
er either  lulls  into  a  sense  of  security  the  careless 
or  heedless  borrower,  confirms  the  reckless  financial 
habit,  or  establishes  the  dishonesty  if  such  exists. 
An  unanalyzed  statement  is  therefore  worse  than  no 
statement  at  all. 

Frank  and  open  statements,  bearing  upon  their 
face  the  evidence  of  a  true  condition  of  affairs,  are 
the  greatest  factors  in  establishing  credit.  Nothing 
will  more  firmly  cement  the  union  between  borrow^er 
and  banker  than  such  a  statement,  and  nothing  will 
be  of  more  value  to  a  banker  and  of  less  harm  to  an 
honest,  enterprising  borrower.  Hidden  facts  are  re- 
vealed by  analysis  and  skill  in  reading  between  the 
lines  Is  an  important  part  of  the  credit  man's  train- 
ing.   By  this  means  weaknesses  may  frequently  be 


142  BANKING,  CREDIT  AND  FINANCE 

discovered  and  proper  steps  taken  to  avert  trouble 
before  acute  difficulty  arises. 

§  169.    Principles  and  Rules  of  Credit  Science. 

— Let  us  summarize,  then,  the  principles  and  rules 
of  the  credit  science  of  to-day. 

Its  principles  are:  (1)  To  reduce  losses.  (2)  To 
eliminate  disproportionate  risks.  (3)  To  conserve 
worthy  interests.  (4)  To  war  on  dishonesty  and  in- 
competence. 

Its  mechanism  includes:  (1)  The  statement  of 
condition,  showing  assets  and  liabilities,  annual  busi- 
ness, net  results  of  business,  and  commercial  ex- 
penses.   (2)   The  credit  department. 

Its  guiding  rules  in  the  present  state  of  bank 
credits  are  the  following: 

Rule  No.  1.     Quick  assets  only  are  a  basis  for  loans. 

Eule  No.  2.  Fixed  assets  only  considered  as  giv- 
ing an  unknown  support  to  the  quick  assets. 

Rule  No.  3.  The  debt  limit  of  the  borrower  has 
been  exceeded  when  his  liabilities  exceed  50  per 
cent  of  his  quick  assets  (the  so-called  50  per  cent 
credit  rule). 

§  170.  Accuracy  is  Required. — Let  us  turn  to 
the  next  step  in  the  development  of  credit  science.  At 
the  outset  we  remarked  that  there  was  a  growing 
requirement  that  bankers  in  large  money  centers 
should  be  expert  in  credit  matters;  it  is  necessar}^, 
therefore,  that  the  means  or  mechanism  by  which 
they  are  to  inform  themselves  should  be  kept  fully 
abreast  of  the  times.    The  next  step  in  the  develop- 


BANK  CREDITS  143 

ment  of  credit  science  therefore  lies  in  the  direction 
of  accuracy.  The  trend  of  every  science  is  toward 
exactness.  The  advance  to  this  point  justifies  a 
further  step  in  advance.  Low  rates  of  interest  on 
loans  make  losses  intolerable.  General  prosperity 
and  other  conditions  limit  the  field  for  commercial 
loans  at  paying  rates  and  require  bankers  carefully 
to  safeguard  any  extension  of  the  field  of  loans  by 
exact  and  accurate  credit  tests. 

This  next  step  may  be  taken  by  establishing  the 
custom  of  requiring  statements  of  financial  condi- 
tion to  bear  joint  certificates  of  a  certified  public 
accountant  and  of  an  engineer: 

(a)  As  to  the  valuation  of  cash  assets. 

(b)  As  to  valuation  of  merchandise  assets. 

(c)  As  to  valuation  of  plant  assets. 

(d)  As  to  liabilities. 

(e)  As  to  net  worth. 

(f)  As  to  gross  business. 

(g)  As  to  past  results  of  business, 
(h)  As  to  future  prospects. 

§  171.  Value  of  the  Accountant.— The  certified 
public  accountant  has  come  into  prominence  within 
the  last  few  years  and  his  profession  has  the 
guarantee  of  law  in  most  states  of  the  Union.  He 
concerns  himself  with  the  books  of  account,  and 
records  and  statements  prepared  by  him  have  the 
support  of  such  books,  and  the  banker  has  the  sense 
of  security  due  to  the  disinterested  and  impartial 
nature  of  the  accountant's  position.  He  may  be 
called  the  referee  in  accountancy  and  the  expert  on 
cash  valuations. 


144  BANKING,  CREDIT  AND  FINANCE 

§  172.    Value   of  the   Engineer. — The   engineer 

deals  with  physical  matters.  His  valuation  on  mer- 
chandise is  essential  in  determining  quick  assets. 
He  concerns  himself  with  the  valuation  of  the  fixed 
assets  and  the  adaptability  of  the  plant  to  the  pur- 
poses for  which  it  is  being  used.  His  analysis  of  all 
correlated  questions  respecting  raw  supplies,  vulner- 
ability to  competition,  price  fluctuations,  trade,  and 
similar  conditions  is  essential  to  a  right  interpreta- 
tion of  statements  of  concerns  affected  by  such  ques- 
tions. 

§  173.    Inaccurate  and  Dishonest  Statements. — 

This  radical  step  is  made  necessary  because  inaccu- 
rate and  dishonest  statements  are  constantly  received 
by  bankers.  Many  statements  reach  them  which 
are  made  by  irresponsible  parties — clerks  and  under- 
men — and  the  management  is  frequently  in  ignorance 
of  true  conditions.  Protection  against  such  is  es- 
sential. 

§  174.    All  Benefited  by  Examination. — All  are 

benefited  by  the  examination  of  their  assets.  The 
interpretation  of  credit  statements  is  a  technical 
operation,  and  the  statements  prepared  by  trust- 
worthy professional  men  are  generally  more  reliable 
than  those  not  so  prepared.  The  hard  and  fast  50 
per  cent  credit  rule  long  observed  by  bankers  has 
failed,  and  an  exact  and  accurate  study  of  each 
individual  concern  now  takes  its  place,  each  concern 
being  entitled  to  credit  on  its  merits.  Working  on 
imperfect  information  and  applying  one  credit  rule 
resulted  necessarily  in  a  destructive  policy.  Accura- 
cy enables  the  banks  to  follow  a  constructive  policy, 


BANK  CREDITS  145 

which  is  more  nearly  in  accord  with  their  position  in 
the  business  world. 

When  statements  are  subjected  to  searching  an- 
alysis, certified  public  accountants  and  engineers, 
then  credit  is  extended  strictly  on  the  merit  of  the 
individual  applying  for  loans. 

§  175.  Practical  Features  of  Bank  Credits. — We 
may  now  consider  some  practical  features  of  the 
business  based  on  bank  credits,  such  as  the  relative 
volume  of  bank  loans  on  conmiercial  paper  to  the 
various  classes  of  borrowers.  While  this  relation 
undoubtedly  fluctuates  widely,  the  following  state- 
ment reflects  about  the  average  condition: 

Per  cent 

Commercial  loans  by  bankers  to  retailers 50 

Commercial  loans  by  banks  to  connnission  men..  15 

Commercial  loans  by  banks  to  jobbers —  30 

Commercial  loans  by  bankers  to  retailers 05 

^00 

This  was  ascertained  from  the  distribution  of  186 
different  loans,  aggregating  upward  of  thirteen  mil- 
lion dollars.  The  average  distribution  of  some  sixty 
million  dollars  of  loans  placed  through  brokers  in 
New  York  gave  the  following  relative  proportions : 

Per  cent 
Commercial  loans  through  brokers  to  maanu- 

facturers 45 

Commercial  loans  through  brokers  to  commis- 
sion men 15 

Commercial  loans  through  brokers  to  jobbers....  30 
Commercial  loans  through  brokers  to  retailers  ..  10 

100 


146  BANKING,  CREDIT  AND  FINANCE 

Tile  striking  preponderance  of  loans  from  banks 
to  manufacturers  is  evident  from  both  of  these 
statements.  It  becomes  of  interest,  then,  to  study 
fm^ther  these  various  classes  of  borrowers,  and  from 
the  statements  of  about  one  hundred  concerns  a  set 
of  typical  balance  sheets  has  been  prepared  that  will 
be  of  profit  to  the  reader  to  study  with  care. 

§  176.    Typical  Balance  Sheet  for  Manufacturers. 

Number  of  concerns  averaged  62 

Per  cent 

Quick  assets    $1,000,000  44 

Fixed  assets   1,270,000  56 

Total  assets    $2,270,000  100 

Liabilities    610,000  27 

Net  worth  $1,660,000  73 

Liabilities  61  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets  $3.30 

for  44  concerns. 
Gross  sales  per  $1  total  assets  1.60 

for  44  concerns. 

§  177.  Typical  Balance  Sheet  for  Commission  Men. 

Number  of  concerns  averaged 7 

Per  cent 

Quick  assets   $1,000,000  95 

Fixed  assets   50,000  5 

Total  assets   -. $1,050,000  100 

Liabilities   520,000  50 

Net  worth  $    580,000  50 

Liabilities  52  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $3.60 

Gross  sales  per  $1  total  assets 3.45 


BANK  CREDITS  147 

§  178.    Typical  Balance  Sheet  for  Jobbers. 

Number  of  concerns  averaged 28 

Per  cent 

Quick  assets   $1,000,000  90 

Fixed  assets 110,000  10 

Total  assets   $1,110,000  100 

Liabilities  440,000  40 

Net  worth   $    670,000  60 

Liabilities  44  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $2.25 

on  25  concerns. 

Gross  sales  per  $1  total  assets 2.08 

on  25  concerns. 

§•  179.    Typical  Balance  Sheet  for  Retailers. 
Number  of  concerns  averaged    6 

Per  cent 

Quick  assets   $1,000,000  75 

Fixed  assets    330,000  25 

Total  assets   $1,330,000  100 

Liabilities   480,000  36 

Net  worth  $    850,000  64 

Liabilities  48  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $2.33 

on  5  concerns. 

Gross  sales  per  $1  total  assets 1.82 

on  5  concerns. 

§  180.  Proportion  of  Quick  Assets. — The  exact- 
ness of  these  relations  is  not  important  for  our  studv 
of  the  principles  involved  in  credit  research.  Suffice 
it  to  say  that  a  study  of  the  several  balance  sheets 
will  disclose  interesting'  comparisons.    It  is  instruc- 


148  BANKING,  CREDIT  AND  FINANCE 

tive  to  note  in  these  balance  sheets  the  relative  pro- 
portion of  quick  to  total  assets: 

Per  cent 

Manufacturers  have  quick  assets  of  total  assets  44 
Commission  men  have  quick  assets  of  total  assets  95 
Jobbers  have  quick  assets  of  total  assets  90 

Retailers  have  quick  assets  of  total  assets  75 

What  stronger  argument  could  there  be  for  ac- 
curacy in  credit  methods  than  that  manufacturers, 
who  borrow  one-half  the  money  loaned  on  commercial 
paper,  have  56  per  cent  of  their  assets  in  such  form 
that  banlvs  may  reject  them  as  unknown  and  unknow- 
able on  account  of  imperfect  information  and  in- 
ability to  determine  their  value? 

§  181.  Net  Worth  of  Borrowers.— Again,  refer- 
ring to  these  balance  sheets,  let  us  compare  the  net 
worth  of  these  classes  of  borrowers: 

Manufacturers  show  net  worth  73  per  cent  of  their 
assets. 

Commission  men  show  net  worth  50  per  cent  of 
their  assets. 

Jobbers  show  net  worth  60  per  cent  of  their  assets. 

Retailers  show  net  worth  64  per  cent  of  their 
assets. 

From  the  face  of  this  statement  the  manufacturer 
maintains  an  eminently  satisfactory  margin  behind 
his  loans,  and  what  bankers  want  to  know  is  that  this 
claimed  margin  is  conservatively  valued. 

§  182.  Assets  and  Sales.~Let  us  now  examine 
into  the  gross  sales  which  tell  the  tale  of  the  entire 


BANK  CREDITS  149 

managerial  activity,  the  mobility  of  the  quick  or 
working  capital: 

Manufacturers,  gross  sales  per  $1  quick  assets  $3.30 
Commission  men,  gross  sales  per  $1  quick  assets  3.60 
Jobbers,  gross  sales  per  $1  quick  assets  2.25 

Eetailers,  gross  sales  per  $1  quick  assets  2.33 

Here  we  are  face  to  face  with  the  most  telling 
factor  against  a  hard-and-fast  credit  test,  in  that 
the  wide  diif erence  in  results  in  the  various  lines  of 
business  are  brought  out.  How  can  a  uniform  credit 
test  be  applied  to  such  widely  varying  lines  of  busi- 
ness? 

Of  equal  importance  in  showing  the  variations  in 
different  lines  of  commercial  enterprise'are' thefigures 
comparing  the  gross  business  done  per  $1  of  total 
assets,  representing  as  it  does  the  total  investment 
in  plant  and  working  capital: 

Manufacturers,  gross  sales  per  $1  total  assets.—  $1.60 
Commission  men,  gross  sales  per  $1  total  assets..  3.45 

Jobbers,  gross  sales  per  $1  total  assets 2.08 

Retailers,  gross  sales  per  $1  total  assets 1.82 

§  183.  Failure  of  Uniform  Credit  Tests. — Becoming 
more  specific  in  our  inquiry  we  may  also  come  to  the 
conclusion  that  if  a  uniform  credit  test  fails,  when 
applied  to  various  lines  of  business,  such  as  manu- 
facturing, jobbing,  etc.,  it  w^ill  also  fail  when  applied 
to  various  branches  of  the  same  line  of  business. 

The  following  figures  taken  from  the  twelfth 
census  of  the  United  States  will  illustrate  the  wide 
variations  among  manufacturing  interests.  The 
census  report,  covering  the  various  branches  of  the 


150  BANKING,  CREDIT  AND  FINANCE 

manufacturing  division  of  commercial  affairs  showed 
a  proportion  of  working  capital  to  total  capital  as 
follows: 

Per  cent  of 
Working  Capital  to 

No.  of  Concerns  Total  Capital 

Food  products 61,302  46 

Textiles,    30,048  54 

Iron  and  Steel    13,896  50 

Lumber    47,079  45 

Leather     16,989  72 

Paper  and   Printing    26,747  40 

Liquors    7,861  41 

Chemicals  5,444  51 

Clay,  glass,  etc 14,809  37 

Metals    16,305  52 

Tobacco     15,252  76 

Vehicles  for  land  transportation 10,113  53 

Shipbuilding    1,116  45 

There  will  be  noted  a  fluctuation  from  37  per  cent 
to  76  per  cent,  while  all  these  industries  averaged 
48.8  per  cent,  these  variations  emphasizing  the  futil- 
ity of  uniform  credit  tests. 

The  census  report  also  gave  some  interesting  facts 
regarding  the  fluctuation  in  the  gross  business  per  $1 
working  capital  and  $1  total  capital  as  showTi  below^ : 

Gross  Business 
per  $1  of 

No.  of  Working  Total 

Concerns  Capital              Capital 

Food  products  61,302  $5.22  $2.42 

Textiles     30,048  2.24  1.20 

Iron  and  steel  13,896  2.33  1.17 

Lumber     47,070  2.40  1.09 

Leather     16,989  2.35  1.17 

Paper  and  printing 26,747  2.70  1.09 

Liquors    7,861  1.96  .79 

Chemicals     5,444  2.17  1.11 

Clay,  glass,  etc 14,809  2.28  .83 

Metals     16,305  3.52  1.83 

Tobacco     15,252  3.02  2.28 

Vehicles  for  land  transptn 10,113  2.42  1.21 

Shipbuilding     1,116  2.14  .97 

Average   $2.70  $1.32 


BANK  CREDITS  151 

Observing  this  it  will  be  noted  that  the  gross  busi- 
ness per  $1  of  working  capital  varied  from  $1.96  to 
$5.22.  The  gross  business  per  $1  of  total  capital 
varied  from  79  cents  to  $2.42.  This  further  empha- 
sizes the  fact  that  lines  of  business  should  be  judged 
strictly  on  their  individual  merits,  rather  than  by 
hard  and  fast  rules. 

It  would  be  interesting,  if  space  permitted,  to 
compare  many  of  the  branches  of  these  industries 
which  vary  even  more  widely  than  the  grand  division 
of  manufacturers.  Every  consideration  seems  to  im- 
press the  fact  that  one  of  the  cardinal  and  funda- 
mental principles  of  credit  science  must  be  accuracy 
in  all  the  term  implies.  This  forces  us  to  the  conclu- 
sion that  the  old  50  per  cent  credit  rule  as  regards 
quick  assets  to  liabilities  should  not  be  the  chief 
factor  in  fixing  upon  the  responsibility  of  borrowers 
in  the  light  of  the  variation  among  the  various  classes 
enumerated.  The  time  is  coming  when  all  bankers 
will  be  compelled  to  secure  information  which  is 
accurate  and  reliable,  and  which  has  behind  it  the 
weight  of  certification  and  proof. 

§  184.  To  Encourage  Manufacturers. — Bankers 
naturally  look  forward  to  extending  commercial  loans 
at  paying  rates  of  interest.  Inasmuch  as  loans  which 
are  secured  by  assets  not  readily  convertible  into 
cash  are  those  which  are  subject  to  higher  rates,  the 
field  of  the  manufacturers,  now  representing  fully 
one-half  of  the  loans  direct  from  banks,  is  entitled 
to  the  most  careful  consideration  in  the  study  of 
bank  credits,  and  is  of  such  importance  as  to  demand 
intelligent  examination  and  scientific  treatment. 


152  BANKING,  CREDIT  AND  FINANCE 

The  manufacturers  of  the  United  States,  number- 
ing upwards  of  500,000  concerns,  have  a  gross  prod- 
uct of  $25,000,000,000  requiring  an  investment  in 
plant  and  working  capital  of  $23,000,000,000— a 
volume  of  business  and  extent  of  investment  which  is 
stupendous  in  the  extreme.  The  manufacturer  is 
essentially  the  prime  mover  of  commerce,  and  has 
to  carry  a  large  investment  in  plant  and  machinery. 
Invention  and  improvement  of  machinery  and  prod- 
ucts are  continuous,  thus  making  large  inroads  into 
his  sinking  fund  for  renewals  and  scrapped  machin- 
ery. He  must  maintain  large  stocks  of  raw  material 
and  be  secure  in  the  continuity  of  his  supplies.  He 
must  carry  large  values  of  goods  in  process.  He 
must  risk  the  fluctuations  in  the  cost  of  raw  materials 
and  sales  value  of  his  finished  goods.  He  must  take 
chances  on  changes  in  style  and  be  at  the  mercy  of 
the  caprice  of  fashion.  All  of  these  considerations 
should  lead  banks  to  count  upon  the  manufacturer  as 
substantial,  conservative,  keen  after  business,  acute 
for  economies ;  and  the  exent  of  his  investment  should 
give  him  such  an  intense  personal  interest  in  his 
enterprise  that  banks  should  expect  to  find  him  the 
most  promising  of  their  applicants  for  loans.  But 
to  handle  this  business  safely  and  wisely  demands 
accuracy  in  credit  methods. 

§  185.  Importance  of  Credit  Science. — Credit 
science  now  occupies  a  prominent  place  in  commer- 
cial affairs.  The  requirement  of  credit  is  a  proper 
and  necessary  condition  of  business,  and  the  useful- 
ness of  credit  is  firmly  established.  Every  consider- 
ation demands  of  the  banks  that  as  this  science  de- 
velops it  shall  be  firmly  established  in  all  respects 


BANK  CREDITS  153 

upon  substantial  principles,  and  that  as  its  rules  and 
customs  are  unfolded  from  time  to  time  they  shall 
serve  to  strengthen  jointly  the  bank  in  extending 
credit  and  the  borrower  in  taking  advantage  of  the 
credit. 

It  requires  joint  and  harmonious  action  on  the 
part  of  all  interested  in  bank  credits  to  accomplish 
the  forward  step  which  has  been  outlined  in  this 
chapter;  but  where  this  is  accomplished,  judging 
from  banking  experience  in  the  past,  the  results  are 
of  surpassing  value  to  the  entire  commercial  com- 
munity. 

Let  us  restate,  then,  the  principal  facts  regarding 
this  advance  step,  w^hich  is  recommended  in  prin- 
ciple to  all  banks  and  has  already  been  taken  by 
many  of  them: 

(1.)     It  shall  be  in  the  direction  of  accuracy. 

(2.)  Statements  of  condition  shall  be  required  of 
borrow^ers,  bearing  the  certificate  of  certified  public 
accountants  and  of  engineers,  (as  competent  judges 
of  assets). 

(3.)  Statements  of  condition  shall  be  invariably 
analyzed  faithfully  and  accurately,  and  with  all  the 
thoroughness,  weight  of  experience,  and  knowledge 
which  can  be  brought  to  bear  upon  them  by  best  or- 
ganization and  equipment. 


154  BANKING,  CREDIT  AND  FINANCE 

Questions  for  Review,  Chapter  VII. 

1.  When  did  the  introduction  of  credit  departments  in 
banks  become  general? 

2.  When  did  the  American  Banker's  Association  adopt 
a  uniform  property  statement  blank  for  the  use  of  bor- 
rowers ? 

3.  When  did  the  National  Association  of  Credit  Men 
adopt  uniform  statement  blanks? 

4.  What  are  the  basic  principles  of  credit  science  as  it 
is  now  understood? 

5.  Why  is  it  now  more  imperatively  necessary  than  ever 
for  bankers  to  be  fully  informed  upon  the  credit  of  bor- 
rowers ? 

6.  Is  a  proper  "statement  of  condition"  of  any  value  to 
the  borrower  as  well  as  to  the  bank,  and  why? 

7.  What  are  the  requirements  of  a  modern  bank  credit 
department  ? 

8.  Why  is  it  necessary  that  a  statement  of  condition 
should  be  submitted  to  analysis? 

9.  Give  a  summary  of  the  mechanism  and  rules  of 
credit  science. 

10.  What  is  the  nature  of  the  so-called  "50  per  cent, 
credit  rule"? 

11.  How  do  certified  public  accountants  and  engineers 
assist  the  credit  department? 

12.  About  what  percentage  of  commercial  loans  are  made 
by  banks  to  manufacturers?  to  commission  men?  to  re- 
tailers ? 

13.  What  distinction  is  made  by  banks  between  "quick" 
assets  and  "fixed"  assets? 

14.  What  is  the  average  proportion  of  quick  assets  to 
total  assets  of  manufacturers?  of  commission  men?  of  re- 
tailers ? 


CHAPTER  VIII 

The  Clearing  House. 

Section  186.  An  Essential  System. — ^In  largo 
cities  checks  representing  millions  of  dollars  are  de- 
posited in  the  banks  every  day.  The  separate  col- 
lection of  these  would  be  almost  impossible,  were  it 
not  for  the  clearing-house  system. 

Each  large  city  has  its  clearing-house.  It  is  an 
establishment  formed  by  the  banks  themselves,  and 
for  their  own  convenience.  The  leading  banks  of  a 
city  connect  themselves  with  the  clearing-house  of 
that  city  and  through  other  banks  with  the  clearing- 
houses of  other  cities,  particularly  New  York.  Coun- 
try banks  connect  themselves  with  one  or  more  clear- 
ing-house through  city  banks  which  do  their  business 
for  them.  The  New  York  banks,  largely  through  pri- 
vate bankers,  branches  of  foreign  banking  houses, 
connect  themselves  with  London.  So  that  each  bank 
in  the  world  is  connected  indirectly  with  every  other 
bank  in  the  world,  and  in  London  is  the  final  clear- 
ing-house of  the  world.  The  daily  clearings  in  New 
York  in  a  recent  year  averaged  $326,505,468  (for  51 
banks)  and  the  average  daily  balances  paid  in  monev 
amounted  to  $13,797,644. 

Usually  once  a  week  the  banks  of  a  city  make  to 
their  clearing-house  a  report  based  on  daily  balances, 
of  their  condition. 

155 


156  BANKING,  CREDIT  AND  FINANCE 

§  187.  Check  Collections. — Each  bank  in  a  city 
receives  on  deposit,  daily,  checks  on  other  banks. 
Instead  of  sending  these  by  messenger  to  the  other 
banks  they  are  sent  to  the  clearing-house  at  a  fixed 
hour  each  day — ^in  some  cities  twice  a  day. 

The  banks  of  a  clearing-house  city  are  numbered. 
These  numbers  are  seen  stamped  upon  checks  which 
the  banli  handles  in  the  process  of  collection.  Bank 
A  may  for  instance  carry  checks  amounting  to  $200,- 
000  to  the  clearing-house  for  collection.  Banks  C,  D, 
E  and  F  may  have  checks  on  A  amounting  to  $189,- 
240,  which  they  send  to  the  clearing-house  for  collec- 
tion. This  would  show  a  balance  of  $10,760  in  A's 
favor,  which  is  paid  to  bank  A  by  the  clearing-house 
in  clearing-house  certificates  or  due  bills.  If  the  bal- 
ance were  against  A,  the  amount  due  would  have  to 
be  made  up  within  the  hour  limit  fixed  by  the  clear- 
ing-house regulations. 

Suppose,  for  illustration  that  Brown  of  Lynn  owes 
Smith  of  Media  $25,  and  pays  the  amount  by  a  check 
on  a  Lynn  bank.  This  check  will  go  by  mail  from 
Lynn  to  Media.  Smith  will  deposit  it  in  a  Media 
bank.  The  Media  bank  will  send  it  with  other  checks 
to  its  Philadelphia  correspondent,  say  the  Penn 
National.  The  Penn  National  will  send  it  with  other 
checks  to  its  New  York  correspondent,  say  the 
Chemical  National.  The  Chemical  will  forward  it 
with  other  checks  to  its  Boston  correspondent,  say 
the  First  National.  Now  the  First  National  of  Boston 
may  not  be  the  Boston  correspondent  of  the  Lynn 
bank.  It  therefore  sends  the  check  for  collection 
through  the  Boston  clearing-house  to  the  bank  which 
does  the  Boston  business  for  the  particular  Lynn 


THE  CLEARING  HOUSE  157 

bank  upon  which  the  check  is  drawn,  say  the  Second 
National.  The  Second  National  sends  the  check  to 
Lynn,  where  it  is  charged  up  against  Brown's  ac- 
count. This  system  of  collections  is  almost  as  per- 
fect as  is  the  post-office  system  of  carrying  registered 
mail. 

g  188.  The  Wanderings  of  Checks.— Under  old- 
fashioned  methods,  each  bank  was  in  the  habit  of 
selecting  its  collection  agents,  sending  them  by  mail 
their  collection  paper,  charging  their  customers 
very  substantial  collection  rates  and  passing  the 
same  to  their  credit  when  collected.  Nowadays  the 
country  trader,  no  matter  where  he  is  located,  sends 
his  check  on  a  local  bank  to  pay  his  account  in  a 
distant  city,  and  the  receiver  of  the  check  expects 
his  bank  to  collect  the  amount  of  the  check  free  of 
expense,  and  to  give  him  full  credit  for  it  the  day  it 
is  deposited. 

Suppose  for  instance  that  a  merchant  of  Selma, 
Ala.,  sends  his  check  on  a  Selma  bank  by  mail  to 
pay  a  bill  in  Alpena,  Mich.  The  Alpena  merchant 
deposits  it  in  his  local  bank,  and  this  local  bank  sends 
it  to  its  Detroit  correspondent;  that  is,  deposits  it 
in  the  Detroit  bank  where  its  account  is  kept.  The 
Detroit  bank  sends  the  check  to  its  Chicago  corres- 
pondent. The  Chicago  bank  may  have  no  connection 
with  a  Southern  city.  It  sends  the  check  to  its  New 
York  correspondent.  The  New  York  bank  forwards 
the  check  to  New  Orleans,  where  it  may  pass  through 
the  clearing-house  to  some  other  New  Orleans  bank 
which  forwards  it  to  its  correspondent  in  Mobile. 
The  Mobile  bank  sends  the  check  to  Selma,  and  has 


158  BANKING,  CREDIT  AND  FINANCE 

it  charged  up  to  the  account  of  the  man  who  issued 
it. 

Now  all  these  banks  and  clearing-houses  through 
which  the  check  passes,  stamp  their  indorsement  and 
other  information  on  the  back  of  the  check,  so  that 
the  check  itself  bears  a  complete  record  of  its  travels. 

Millions  of  dollars  are  collected  by  banks  daily  in 
this  way,  and  generally  without  expense  to  their 
customers.  It  is  estimated  that  these  collections 
cost  the  New  York  city  banks  more  than  two  million 
dollars  a  year  in  loss  of  interest  while  the  checks 
are  en  route.  Fifteen  thousand  collection  letters 
are  sent  out  every  day  by  the  banks  of  Nev/  York 
City  alone.  There  have  been  spasmodic  attempts  in 
some  cities  to  make  a  charge  for  the  collection  of 
out-of-town  checks,  but  such  attempts  are  unpopular 
among  business  men. 

§  189.  General  Rules. — The  following  selections 
from  the  general  rules  of  a  large  clearing-house  will 
give  the  reader  some  idea  of  the  exacting  character 
of  clearing-house  regulations: 

**  Errors  in  the  exchanges  and  claims  arising  from 
the  return  of  checks  or  other  cause  are  to  be  adjusted 
directly  between  the  banks  which  are  parties  therein, 
and  not  through  the  clearing-house. 

"Whenever  checks  which  are  not  good  are  sent 
through  the  clearing-house  they  shall  be  returned  by 
the  banks  receiving  the  same  to  the  banks  from  which 
they  were  received  as  soon  as  it  shall  be  found  that 
said  checks  are  not  good;  and  in  no  case  shall  they 
be  retained  after  one  o'clock. 


THE  CLEARING  HOUSE  159 

''The  manager  shall  immediately  report  to  the 
clearing-house  committee  any  apparent  irregularity 
in  the  dealings  of  any  bank  belonging  to  the  associa- 
tion that  comes  to  his  notice,  and  receive  the  in- 
structions of  the  committee  in  regard  thereto. 

"The  committee  shall  have  power  to  remove  the 
manager  or  any  of  the  clerks,  whenever,  in  their 
opinion,  the  interests  of  the  association  shall  require 
it. 

"The  hour  for  making  the  exchanges  at  the  clear- 
ing-house shall  be  ten  o'clock  A.  M.  each  day.  At 
a  quarter  past  twelve  o'clock,  noon,  the  debtor  banks 
shall  pay  to  the  manager,  at  the  clearing-house,  the 
balances  due  from  them  respectively  either  in  coin 
or  in  such  other  currency  as  the  laws  of  the  United 
States  shall  require,  or  in  such  certificates  as  shall 
be  authorized  by  the  clearing-house  association,  ex- 
cepting sums  less  than  one  thousand  dollars,  which 
may  be  paid  in  bills  of  the  debtor  bank. 

"At  half -past  one  o'clock  P.  M.  the  creditor  banks 
shall  receive  from  the  manager,  at  the  same  place 
the  balances  due  to  them  respectively;  provided  all 
the  balances  due  from  the  debtor  banks  shall  then 
have  been  paid  to  him. 

"Should  any  bank  fail  to  pay  the  balance  due  from 
it  at  the  proper  hour  the  amount  of  such  balance 
shall  be  immediately  furnished  to  the  clearing-house 
by  the  several  other  banks  in  proportion  to  their 
respective  balances  against  the  defaulting  bank  re- 
sulting from  the  exchanges  of  that  day." 

g  190.     Clearing-house  Clerks.— The  bank  clerks 


160  BANKING,  CREDIT  AND  FINANCE 

who  attend  to  the  clearing-house  business  must  be 
experts  in  their  special  work.  The  slightest  error  on 
the  part  of  one  clerk  may  prolong  indefinitely  the 
entire  settlement.  As  a  check  against  error  very 
severe  rules  and  penalties  are  established.  The  fol- 
lowing are  samples  from  the  by-laws  of  the  same 
clearing-house  whose  general  rules  are  quoted  above : 

**1.  For  disorderly  conduct  of  any  clerk,  or  other 
officer,  at  the  clearing-house,  or  disregard  of  the 
manager's  rules  and  instructions,  for  each  offense, 
fine  $4.00. 

*'2.  For  any  officer  failing  to  attend  punctually 
at  the  hour  for  making  the  exchanges,  $4.00. 

**3.  Debtor  banks,  failing  to  appear  to  pay  their 
balances  before  a  quarter  past  12  o'clock,  $3.00. 

**4.  Any  error  in  the  credit  ticket  (that  is  the 
amount  brought),  $2.00. 

*'5.  Errors  in  making  the  balance  ticket  (that  is, 
the  amount  received)  entries,  $2.00. 

^^6.  Failing  to  deliver  check  tickets  before  half- 
past  ten  o'clock,  $1.00. 

' '  7.     All  other  errors,  $2.00. 

^*Any  clerk,  or  other  officer,  who  shaU  repeatedly 
and  perseveringly  disobey  the  orders  or  instructions 
of  the  manager,  shall,  with  the  approbation  of  the 
clearing-house  committee,  be  expelled,  and  not  re- 
admitted without  the  written  consent  of  the  commit- 
tee. Thirty  minutes  will  be  allowed  for  the  morning 
business  settlement,  and  for  each  additional  fifteen 


THE  CLEARING  HOUSE  161 

minutes'  detention,  $2  will  be  added  to  the  fine  under 
No.  3." 

§  191.  Foreign  Clearing-Houses.— England  has 
three  bank  clearing-houses  and  France  one.  The 
clearing  principle  is  used  in  England  to  adjust  the 
complicated  accounts  of  the  through  traffic  of  con- 
necting railroads,  and  to  simplify  the  fortnightly  de- 
liveries of  stock  on  the  London  Stock  Exchange. 
Every  clearing-house  bank  in  London,  and  the  clear- 
ing-house itself,  keeps  accounts  with  the  Bank  of 
England,  and  differences  are  settled  by  transfers 
from  one  account  to  another. 

London  originated  the  clearing-house.  It  was 
formed  spontaneously  by  the  clerks  of  the  London 
private  bankers,  who,  to  save  themselves  the  trouble 
of  going  about  to  each  bank,  got  into  the  habit  of 
meeting  in  a  central  room  to  settle  their  mutual 
claims.  A  similar  practice  arose  among  French 
merchants,  in  old  times,  of  making  their  bills  payable 
at  the  great  annual  fair  in  Lyons,  where  they  met 
to  balance  their  debts,  and  pay  the  differences. 

If  gold  were  to  be  used  instead  of  the  clearing- 
house machinery  in  either  New  York  or  London,  the 
weight  to  be  moved  every  day  long  distances  would 
exceed  200  tons.  The  clearing-house  establishes  a 
fellowship  among  banks  that  has  already  proved,  in 
times  of  financial  panics,  of  the  gi^eatest  service  to 
themselves  and  the  community,  while  the  value  of 
its  daily  service  to  the  public  is  incalculable. 


162  BANKING,  CREDIT  AND  FINANCE 

Questions  for  Review,  Chapter  VIII. 

1.  What  is  the  object  of  the  modem  clearing-house  sys- 
tem? 

2.  Where  do  we  find  the  final  clearing-house  of  the  world  ? 

3.  What  is  the  daily  amount  of  the  bank  clearings  in 
New  York  City? 

4.  Sketch  briefly  the  daily  operations  of  a  clearing-house 
in  a  large  city. 

5.  What  kind  of  rules  are  established  by  clearing-houses 
to  prevent  errors? 

6.  Where  did  the  clearing-house  idea  originate? 

7.  For  what   other  purposes   besides   banking  is   the 
clearing-house  principle  used  in  England? 

8.  How  are  the  banks  of  a  city  identified  on  checks  which 
each  bank  handles  for  collection  ? 

9.  How  are  the  balances  of  the  banks  in  a  city  settled 
at  the  clearing  house  ? 

10.  How  often  are  checks  sent  to  the  clearing  house  by 
member  banks? 

11.  What  charge  is  made  by  banks  for  the  collection  of 
out-of-town  checks,  and  is  it  the  rule  to  make  such  a  charge  ? 

12.  What  special  qualification  is  required  in  a  clearing- 
house clerk? 


CHAPTER  IX 

The  Federal  Reserve  System 

Section  192.  Need  of  Government  Control. — On 
June  23,  1913,  President  Wilson  personally  ap- 
peared before  Congress  and  called  public  attention 
to  the  deficiencies  in  the  existing  system  of  bank- 
ing and  currency  in  the  United  States,  at  the  same 
time  urging  prompt  remedial  legislation  by  the 
adoption  of  a  bill  providing  for  the  establishment  of 
a  system  of  Federal  Reserve  Banks,  designed  *'to 
give  the  business  men  of  this  country  a  banking  and 
currency  system  by  means  of  which  they  can  make 
use  of  the  freedom  of  enterprise  and  of  individual 
initiative.'* 

*'We  must  have  a  currency,''  said  the  President, 
*'no.t  rigid  as  now,  but  readily,  elastically  responsive 
to  sound  credit,  the  expanding  and  contracting 
credits  of  everyday  transactions,  the  normal  ebb  and 
flow  of  personal  and  corporate  dealings.  Our  bank- 
ing laws  must  mobilize  reserves;  must  not  permit 
the  concentration  anywhere  in  a  few  hands  of  the 
monetary  resources  of  the  country  or  their  use  for 
speculative  purposes  in  such  volume  as  to  hinder  or 
impede  or  stand  in  the  way  of  other  more  legitimate, 
more  fruitful  uses.  And  the  control  of  the  system 
of  banking  and  of  issue  which  our  new  laws  are  to 

163 


164  BANKING,  CREDIT  AND  FINANCE 

set  up,  must  be  public,  not  private,  must  be  vested 
in  the  Government  itself,  so  that  the  banks  may  be 
the  instruments,  not  the  masters,  of  business  and  of 
individual  enterprise  and  initiative." 

§  193.  Twelve  Reserve  Districts.— C  o  n  g  r  e  s  s 
took  prompt  action,  following  this  message,  and  the 
Federal  Reserve  Bank  Act  became  the  law  of  the 
land  by  the  signature  of  the  President,  on  December 
23,  1913.  It  provided  for  the  establishment  of  not 
less  than  eight  and  not  more  than  tw^elve  Federal 
Reserve  Banks,  and  on  ISTovember  16,  1914,  twelve 
such  banks  were  accordingly  established  and  began 
operation  in  the  following  cities,  Avhich  had  been 
selected  as  the  Reserve  cities  for  the  twelve  Reserve 
Districts  established  under  the  law : 

District  No.  1,  Boston,  Mass.;  No.  2,  New  York, 
N.  Y.;  No  3,  Philadelphia,  Pa.;  No.  4,  Cleveland,  O.; 
No.  5,  Richmond,  Va.;  No.  6,  Atlanta,  Ga.;  No.  7,  Chi- 
cago, 111.;  No.  8,  St.  Louis,  Mo.;  No.  9,  Minneapolis, 
Minn.;  No.  10,  Kansas  City,  Mo.;  No.  11,  Dallas, 
Texas;  No.  12,  San  Francisco,  Cal. 

§  194.  A  New  Epoch  in  Banking. — With  the 
adoption  of  the  Federal  Reserve  Act,  there  was  a 
general  feeling  that  American  business  and  banking 
had  entered  upon  a  new^  epoch.  Many  bankers 
throughout  the  country  hastened  to  apply  for  mem- 
bership in  the  respective  Federal  Reserve  Districts 
and  the  sentiment  among  the  banks  was  typically 
expressed  by  the  directors  of  the  National  Copper 
Bank,  who  said:  **As  we  watched  the  development 
of  the  Act  in  Congressional  debate,  we  became  im- 
pressed with  the  advantages  to  be  gained  through 


THE  FEDERAL  RESERVE  SYSTEM  165 

its  operation,  and  our  later  and  more  careful  study 
has  only  strengthened  our  earlier  impressions. 

"The  great  essentials — reserves,  circulation,  dis- 
counts, acceptances,  refimding  of  bonds,  foreign 
branches,  farm  loans,  clearing  of  transit  items — are 
well  provided  for,  but  with  a  wisdom  which  recog- 
nizes the  dangers  of  sudden  change,  and  allows  years 
in  which  to  perfect  the  transferring  of  banking  opera- 
tions from  the  old  course  to  the  new.  It  is  true  there 
is  great  power  centered  at  Washington,  but  the  coun- 
try's past  experience  with  the  Treasury  Depart- 
ment has  been  such  as  to  w^arrant  confidence  in  the 
future  policies  of  the  Federal  Reserve  Board — ^the 
central  controlling  body  established  by  the  new  Act. 

"Doubtless  there  will  be  alterations  in  the  Act 
from  time  to  time,  as  experience  points  out  better 
methods  here  and  there,  but  in  the  main  we  believe 
the  Act  will  stand  the  test,  and  marks  the  longest 
step  forward  that  American  business  has  taken  in 
many  a  day.'' 

The  belief  is,  in  fact,  general  that  the  United 
States  has  now  the  best  arrangement  in  its  history 
for  making  the  banking  system  responsive  to  the 
needs  of  trade  and  the  monetary  system  elastic 
enough  to  prevent  the  recurrence  of  the  once-dreaded 
panics,  such  as  those  of  1893  and  1907.  The  value  of 
the  Federal  Reserve  Sj^stem  was  apparent  during  the 
World  War  period  and  the  reconstruction  period 
which  followed,  when  it  proved  fully  equal  to  all  de- 
mands made  upon  it  and  aided  greatly  in  maintain- 
ing the  stability  of  the  banks  and  their  value  to  the 
community  in  times  of  stress  and  emergency. 


166  BANKING,  CREDIT  AND  FINANCE 

During  the  first  twelve  months  of  our  country's 
participation  in  the  war  the  reserve  system  became 
established  upon  a  basis  of  confidence  and  respect, 
even  in  fact  of  admiration,  among  both  bankers  and 
business  men;  and  its  future  therefore  seems  as- 
sured so  long  as  good  management  deserves  the  sup- 
port now  enjoyed. 

§  195.  Main  Features  of  the  Act. — Under  this 
system  the  United  States,  as  already  indicated,  is 
divided  into  twelve  Federal  Reserve  Districts,  each 
having  a  regional  Federal  Reserve  Bank  with  a  cap- 
ital of  at  least  $4,000,000  subscribed  by  the  member 
banks  of  the  district.  National  banks  are  obliged 
to  become  members,  while  with  State  banks  and  trust 
companies  membership  is  optional.  There  are  no 
depositors  in  the  Reserve  Bank  of  a  given  district 
except  the  member  banks  themselves  and  the 
United  States  Government,  The  Government  un- 
der the  Act  no  longer  deposits  its  reserve  funds  in 
ordinary  banks,  as  formerly,  or  lets  them  lie  unused 
in  the  vaults  of  the  sub-treasuries;  but  places  them 
in  the  Federal  Reserve  Banks,  subject  to  the  super- 
vision of  the  Federal  Reserve  Board  at  Washington, 
and  to  the  direct  authority  over  them  of  the  Secre- 
tary of  Treasury. 

The  Act  provided  for  an  issue  of  $500,000,000  of 
new  Treasury  notes  of  the  United  States,  to  be  ap- 
portioned among  the  several  Federal  Reserve  Banks, 
and  to  be  supplied  by  them  in  turn  to  the  ordinary 
member  banks  at  such  times  as  money  is  especially 
needed  for  the  transaction  of  business,  as  when 
crops  are  being  moved  and  so  on.     This  supply  of 


THE  FEDERAL  RESERVE  SYSTEM  167 

currency  is  secured  by  the  banks  depositing  commer- 
cial paper  with  the  Federal  Reserve  Bank. 

§  196.  How  Panics  Are  Prevented. — In  ordinary 
times  the  business  of  banking  goes  on  very  much 
as  before  the  passage  of  the  new  Act,  and  merchants 
r.nd  citizens  can  see  little  difference  in  conditions. 
The  ordinary  banks  continue  to  be  independent  con- 
cerns, receiving  deposits  and  lending  money  as  be- 
fore. But  in  exceptional  times,  as  in  1907,  a  great 
difference  will  be  visible.  In  the  panic  of  1907  the 
banks  would  not  even  aUow  a  depositor  to  draw  out 
his  own  money — much  less  would  they  make  the 
customary  loans  on  commercial  paper,  or  other  ap- 
proved security,  even  to  their  most  reliable  cus- 
tomers. Thus,  at  the  very  time  when  the  banks 
were  most  needed  to  aid  and  encourage  business, 
they  ceased  their  functions  and  only  magnified  and 
intensified  the  business  troubles  that  with  a  better 
and  more  elastic  system  they  could  have  prevented. 
The  first  symptom  of  financial  stress  led  every 
banker  to  protect  his  own  reserves,  lest  he  might 
become  the  victim  of  a  ^'run.''  He  lacked  the  sup- 
port of  a  higher  financial  power,  such  as  is  provided 
by  the  Federal  Reserve  Bank  system,  which  prom- 
ises a  complete  remedy  for  such  conditions,  by  sup- 
plying the  funds  to  meet  emergencies  upon  the 
deposit  of  ordinary  commercial  paper  by  the  mem- 
ber banks.  All  the  banks  are  now  practically  fed- 
erated for  mutual  help  under  the  auspices  of  a  central 
Government  board.  For  the  first  time  our  national 
banking  system  possesses  the  real  strength  that  lies 
in  unity. 


168  BANKING,  CREDIT  AND  FINANCE 

§  197.  Federal  Reserve  Agents. — In  each  dis- 
trict there  is  a  Federal  Reserve  Agent  appointed  by 
the  Federal  Reserve  Board,  who  acts  as  chairman 
of  the  board  of  directors  of  a  Reserve  Bank,  main- 
tains a  local  office  of  the  Federal  Reserve  Board, 
makes  reports  to  that  body  and  generally  acts  as  its 
representative  in  ;that  district.  Thus  the  central 
Board  is  enabled  to  keep  in  close  touch  with  busi- 
ness conditions  in  each  district  at  all  times  and  sea- 
sons. 

The  chief  executive  officer  of  each  Reserve  Bank 
is  known  as  its  governor,  and  is  appointed  as  such 
by  the  directors  of  the  bank.  He  presides  at  meet- 
ings of  the  executive  committee,  makes  transfers  of 
secimties,  and  jointly  with  the  cashier  signs  all 
certiiicates  of  stock  of  the  bank.  The  other  officers 
of  each  Reserve  Bank  (all  chosen  by  the  board  of 
directors)  consist  of  a  first  and  second  vice-gover- 
nor and  a  secretary-treasurer  or  cashier. 

§=  198.  Attitude  Toward  Member  Banks.— The 
Federal  Reserve  Bank  of  each  district,  belongs  to 
its  members.  They  have  furnished  the  entire  cap- 
italization and  are  the  sole  depositors;  they  have 
elected  six  of  the  nine  directors  and  the  directors  in 
turn  have  elected  all  the  officers  of  the  bank  except 
the  chairman  of  the  Board.  Furthermore,  the  Fed- 
eral Reserve  Board  has  stated  its  policy  to  be  that  it 
does  not  desire  to  interfere  ^^dth  the  management 
of  the  banks  except  to  see  that  the  law^  is  observed. 
Therefore,  the  attitude  toward  member  banks  is  one 
of  cordial  co-operation  for  the  purpose  of  securing 
for  them  and  through  them  for  the  business  com- 


THE  FEDERAL  RESERVE  SYSTEM  169 

munity  and  the  public  every  advantage  intended 
and  possible  under  the  Act. 

Co-operation  between  the  Federal  Reserve  Banks 
also  has  been  evidenced  by  the  organization  of  a  con- 
ference of  Governors  for  the  purpose  of  considering 
problems  and  questions  that  have  arisen,  and  ex- 
changing views  in  order  that  all  may  have  the  bene- 
fit of  the  views  of  each. 

§  199.  A  Great  Constructive  Measure. — T  h  e 
Federal  Reserve  Act  became  a  law  as  a  great,  far- 
reaching  constructive  measure  to  bring  co-ordina- 
tion and  unity,  consolidation  and  central  control, 
out  of  our  separated  commercial  banks  under  in- 
dividual control.  It  does  this  and  more.  The  Fed- 
eral Reserve  Bank  system  forms  a  financial  base  on 
which  commercial  business  may  depend  in  its  expan- 
sion and  extension  into  new  fields.  Producers  and 
dealers  in  commodities  need  no  longer  fear  an  inade- 
quate money  market  on  which  to  float  commercial 
paper.  The  Reserve  Banks,  created  are  not  sup- 
posed to  do  any  business  of  moment  or  to  initiate 
anything.  All  that  is  left  to  the  public,  and  all  bank- 
ing is  done  as  before  through  the  already  existing 
banks.  The  new  system  provides  a  place,  a  fund, 
a  means  of  creating  credit,  a  system  of  exchanges, 
designed  to  be  equal  to  any  emergency  which  the 
commercial  banks  of  the  country  will  have  to  face, 
and  to  supply  all  the  fair,  legitimate  needs  of  com- 
merce now  apparent. 

The  great  object  of  the  Act  is  to  aid  business — ^its 
regulation  of  banks  is  because  they  are  instruments 
and  most  important  aids  of  commerce. 

Under  the  Reserve  Bank  system,  the  assurance  the 


170  BANKING,  CREDIT  AND  FINANCE 

member  banks  have  is  the  assurance  to  the  manage- 
ment that  they  can  always  cash  in  their  commercial 
notes  and  meet  their  obligations  in  any  emergency; 
the  assurance  to  the  depositor  that  his  money  will 
be  paid  to  him  on  demand  in  cash  in  any  emergency; 
the  assurance  to  their  conmiercial  borrowers  that 
they  w^ill  not  be  compelled  to  shut  down  for  lack  of 
funds  to  buy  goods  or  material,  or  of  currency  for 
their  payrolls. 

§  200.    Practical   Guarantee    of   Deposits. — The 

original  National  Bank  Act  provided  for  supervision 
of  banks,  and  its  amendments  increased  the  efficiency 
of  this  supervision.  The  Federal  Reserve  Act  pro- 
vides additional  safeguards.  The  Comptroller  of  the 
Currency  said:  '* Under  the  provisions  of  the  new 
law,  the  failure  of  efficiently  managed  banks  is  prac- 
tically impossible." 

The  more  stringent  oversight  and  regulation  pro- 
vided by  the  Act  gives  a  hope,  at  least,  that  every 
member  bank  is  solvent,  and  will  so  remain  or  be 
compelled  to  close;  and  that,  should  it  close,  its 
assets  will  pay  its  liabilities;  that  is,  it  practically 
gives  every  depositor  in  a  member  bank  additional 
assurance  that  his  money  in  the  bank  is  safe. 

§  201.  Amendments  to  the  Act. — Since  its  pas- 
sage in  1913,  amendments  have  been  made  to  the 
Federal  Reserve  Act  by  Congress  in  each  year  up  to 
1921.  Its  principal  provisions,  as  amended,  appear 
in  the  following  pages.  It  may  also  be  noted  that  the 
operations  of  the  Federal  Reserve  Banks  and  member 
banks  of  the  Reserve  system  are  or  have  been  af- 
fected, directly  or  indirectly,  by  certain  sections  of 
the  following  Acts  of  Congress; 


THE  FEDERAL  RESERVE  SYSTEM  171 

Clayton  Anti-Trust  Act,  approved  October  15, 1914, 
as  amended  by  Kern  Amendment,  approved  May  15, 
1916,  as  amended  by  the  act  approved  May  26,  1920. 

Amendment  to  Postal  Savings  Act,  approved  May 
18,  1916. 

Farm  Loan  Act,  approved  July  17, 1916. 

First  Liberty  Bond  Act,  approved  April  24,  1917. 

Second  Liberty  Bond  Act,  Approved  September 
24,  1917. 

Third  Liberty  Bond  Act,  approved  April  4, 1918. 

War  Finance  Corporation  Act,  approved  April  5, 
1918,  as  amended  by  the  Victory  Liberty  Loan  Act, 
approved  March  3,  1919. 

An  Act  To  Conserve  the  Gold  Supply  of  the  United 
States,  etc.,  approved  April  23,  1918. 

Trading  With  the  Enemy  Act,  as  amended  by  the 
act  approved  September  24,  1918. 

Section  5172,  Revised  Statutes,  as  amended  by  act 
of  March  3, 1919. 

Section  5200  Revised  Statutes,  as  amended  by  act 
of  September  24,  1918,  and  act  of  October  22,  1919. 

Section  5202,  Revised  Statutes,  as  amended  by  War 
Finance  Corporation  Act,  approved  April  5, 1918,  and 
act  of  October  22, 1919. 

Sections    5208    and    5209,    Revised    Statutes,    as 
amended  by  act  of  September  26,  1918. 
Revenue  Act  of  1918,  approved  February  24,  1919. 

Transportation  Act  of  1920,  approved  February 
28,  1920. 

Appropriation  Act  of  1920,  approved  May  29, 1920. 


172  BANKING,  CREDIT  AND  FINANCE 

§  202.  Terms  of  the  Act.— The  full  title  of  the 
Federal  Reserve  Act  is :  *' An  Act  To  provide  for  the 
establishment  of  Federal  reserve  banks,  to  furnish 
an  elastic  currency,  to  afford  means  of  rediscounting 
commercial  paper,  to  establish  a  more  effective  super- 
vision of  banking  in  the  United  States,  and  for  other 
purposes." 

Wherever  the  word  **bank'*  is  used  in  this  Act, 
the  word  shall  be  held  to  include  State  bank,  bank- 
ing association,  and  trust  company,  except  where 
national  banks  or  Federal  Reserve  banks  are  specifi- 
cally referred  to. 

The  teiTns  ''national  bank"  and  "national  banking 
association"  used  in  this  Act  shall  be  held  to  be 
sjTionymous  and  interchangeable.  The  term  "mem- 
ber bank"  shall  be  held  to  mean  any  national  bank, 
State  bank,  or  bank  or  trust  company  which  has  be- 
come a  member  of  one  of  the  reserve  banks  created 
by  this  Act.  The  term ' '  board ' '  shall  be  held  to  mea» 
Federal  Reserve  Board;  the  term  "district"  shall 
be  held  to  mean  Federal  Reserve  district;  the  term 
"reserve  bank"  shall  be  held  to  mean  Federal  Re* 
serve  bank. 

§  203.  Organization  of  Reserve  Banks. — After 
providing  for  an  Organization  Committee  to  desig- 
nate the  Federal  Reserve  Cities,  etc.,  the  act  provided 
as  follows: 

Under  regulations  to  be  prescribed  by  the  organiza- 
tion committee,  every  national  banking  association 
in  the  United  States  is  hereby  required,  and  every 
eligible  bank  in  the  United  States  and  every  trust 
company  within  the  District  of  Columbia,  is  hereby 
authorized  to  signify  in  writing,  within  sixty  days 


THE  FEDERAL  RESERVE  SYSTEM  173 

after  the  passage  of  this  Act,  its  acceptance  of  the 
terms  and  provisions  hereof.  When  the  organization 
committee  shall  have  designated  the  cities  in  which 
Federal  Reserve  banks  are  to  be  organized,  and 
fixed  the  geographical  limits  of  the  Federal  Reserve 
districts,  every  national  banking  association  within 
that  district  shall  be  required  within  thirty  days  after 
notice  from  the  organization  committee,  to  subscribe 
to  the  capital  stock  of  such  Federal  Resei-ve  bank 
in  a  sum  equal  to  six  per  centum  of  the  paid-up  cap- 
ital stock  and  sui^lus  of  such  bank. 

Any  national  bank  failing  to  signify  its  acceptance 
of  the  teiTns  of  this  Act  within  the  sixty  days  afore- 
said, shall  cease  to  act  as  a  reserve  agent,  upon  thirty 
days'  notice,  to  be  given  within  the  discretion  of  the 
said  organization  committee  or  of  the  Federal  Re- 
serve Board. 

Should  any  national  banking  association  in  the 
United  States  now  organized  fail  within  one  year 
after  the  passage  of  this  Act  to  become  a  member 
bank  or  fail  to  comply  with  any  of  the  provisions  of 
this  Act  applicable  thereto,  all  of  the  rights,  privi- 
leges, and  franchises  of  such  association  granted  to 
it  under  the  National  Bank  Act,  or  under  the  pro- 
visions of  this  Act,  shall  be  thereby  forfeited. 

§  204.  Capital  Stock  Subscribed  by  Banks. — 
Should  the  subscriptions  by  banks  to  the  stock  of 
said  Federal  Reserve  banks  or  any  one  or  more  of 
them  be,  in  the  judgment  of  the  organization  com- 
mittee, insufficient  to  provide  the  amount  of  capital 
required  therefor,  then  and  in  that  event  the  said 
organization  committee  may,  under  conditions  and 
regulations  to  be  prescribed  by  it,  offer  to  public 


174  BANKING,  CREDIT  AND  FINANCE 

subscription  at  par  such  an  amount  of  stock  in  said 
Federal  Reserve  banks,  or  any  one  or  more  of  them, 
as  said  conmiittee  shall  determine,  subject  to  the 
same  conditions  as  to  pajTnent  and  stock  liability  as 
provided  for  member  banks. 

No  individual,  copartnership,  or  corporation  other 
than  a  member  bank  of  its  district  shall  be  permitted 
to  subscribe  for  or  to  hold  at  any  time  more  than 
$25,000  par  value  of  stock  in  any  Federal  Reserve 
bank.  Such  stock  shall  be  known  as  public  stock 
and  may  be  transferred  on  the  books  of  the  Federal 
Reserve  bank  by  the  chairman  of  the  board  of  di- 
rectors of  such  bank. 

No  Federal  Reserve  bank  shall  commence  business 
with  a  subscribed  capital  less  than  $4,000,000.  The 
organization  of  Reserve  districts  and  Federal  Reserve 
cities  shall  not  be  construed  as  changing  the  present 
status  of  reserve  cities  and  central  reserve  cities, 
except  in  so  far  as  this  Act  changes  the  amount  of 
resei'ves  that  may  be  carried  with  approved  Re- 
serve agents  located  therein. 

§  205.  Branch  Banks. — The  Federal  Reserve 
Board  may  permit  or  require  any  Federal  Reserve 
bank  to  establish  branch  banks  within  the  Federal 
Reserve  district  in  which  it  is  located  or  within  the 
district  of  any  Federal  Reserve  bank  which  may  have 
been  suspended.  Such  branches,  subject  to  such 
rules  and  regulations  as  the  Federal  Reserve  Board 
may  prescribe,  shall  be  operated  under  the  supervi- 
sion of  a  board  of  directors  to  consist  of  not  more  than 
seven  nor  less  than  three  directors,  of  whom  a  ma- 
jority of  one  shall  be  appointed  by  the  Federal  Re- 
serve bank  of  the  district,  and  the  remaining  directors 


THE  FEDERAL  RESERVE  SYSTEM  175 

by  the  Federal  Reserve  Board.  Directors  of  branch 
banks  shall  hold  office  during  the  pleasure  of  the 
Federal  Reserve  Board. 

§  206.    Corporate   Power   of  Reserve   Banks. — 

Upon  the  filing  of  a  certificate  of  organization  with 
the  Comptroller  of  the  Currency,  the  said  Federal 
Reserve  bank  shall  become  a  body  corporate,  and  as 
such  shall  have  power — 

First.     To  adopt  and  use  a  corporate  seal. 

Second.  To  have  succession  for  a  period  of  twenty 
years  from  its  organization  unless  it  is  sooner  dis- 
solved by  an  Act  of  Congress,  or  unless  its  franchise 
becomes  forfeited  by  some  violation  of  law. 

Third.     To  make  contracts. 

Fourth.  To  sue  and  be  sued,  complain  and  defend, 
in  any  court  of  law  or  equity. 

Fifth.  To  appoint  by  its  board  of  directors  such 
officers  and  employees  as  are  not  otherwise  provided 
for  in  this  Act,  to  define  their  duties,  require  bonds 
of  them  and  fix  the  penalty  thereof,  and  to  dismiss 
at  pleasure  such  officers  or  employees. 

Sixth.  To  prescribe  by  its  board  of  directors,  by- 
laws not  inconsistent  with  law%  regulating  the  man- 
ner in  which  its  general  business  may  be  conducted, 
and  the  privileges  granted  to  it  by  law  may  be  ex- 
ercised and  enjoyed. 

Seventh.  To  exercise  by  its  board  of  directors, 
or  duly  authorized  officers  or  agents,  all  powers 
specifically  granted  by  the  provisions  of  this  Act 
and  such  incidental  powers  as  shall  be  necessary  to 


176  BANKING,  CREDIT  AND  FINANCE 

carry  on  the  business  of  banking  witbin  tbe  limita- 
tions prescribed  by  this  Act. 

Eighth.  Upon  deposit  with  the  Treasurer  of  the 
United  States  of  any  bonds  of  the  United  States  in 
the  maimer  provided  by  existing  law  relating  to 
national  banks,  to  receive  from  the  Comptroller  of 
the  Currenc}^  circulating  notes  in  blank,  registered 
and  countersigned  as  provided  by  law,  equal  in 
amount  to  the  par  value  of  the  bonds  so  deposited, 
such  notes  to  be  issued  under  the  same  conditions  and 
provisions  of  law  as  relate  to  the  issue  of  circulating 
notes  of  national  banlvs  secured  by  bonds  of  the 
United  States  bearing  the  circulating  privilege,  ex- 
cept that  the  issue  of  such  notes  shall  not  be  limited 
to  the  capital  stock  of  such  Federal  reserve  bank. 

§  207.  Board  of  Directors. — Every  Federal  Re- 
serve bank  shall  be  conducted  under  the  supervi- 
sion and  control  of  a  board  of  directors.  Said  board 
shall  administer  the  affairs  of  said  bank  fairly  and 
impartially  and  without  discrimination  in  favor  of 
or  against  any  member  bank  or  banks  and  shall,  sub- 
ject to  the  provisions  of  law  and  the  orders  of  the 
Federal  Reserve  Board,  extend  to  each  member  bank 
such  discomits,  advancements  and  accommodations 
as  may  be  safely  and  reasonably  made  with  due  re- 
gard for  the  claims  and  demands  of  other  member 
banks. 

Such  board  of  directors  shall  be  selected  as  here- 
inafter specified  and  shall  consist  of  nine  members, 
holding  office  for  three  years,  and  divided  into  three 
classes,  designated  as  classes  A,  B  and  C. 

Class  A  shall  consist  of  three  members,  who  shall 


THE  FEDERAL  RESERVE  SYSTEM  177 

be  chosen  by  and  be  representative  of  the  stock- 
holding banks. 

Class  B  shall  consist  of  three  members,  who  at  the 
time  of  their  election  shall  be  actively  engaged  in 
their  district  in  commerce,  agriculture  or  some  other 
industrial  pursuit. 

Class  C  shall  consist  of  three  members  who  shall 
be  designated  by  the  Federal  Reserve  Board.  When 
the  necessary  subscriptions  to  the  capital  stock  have 
been  obtained  for  the  organization  of  any  Federal 
reserve  bank,  the  Federal  Reserve  Board  shall  ap- 
point the  class  C  directors  and  shall  designate  one  of 
such  directors  as  chairman  of  the  board  to  be  selected. 
Pending  the  designation  of  such  chairman,  the  organ- 
ization committee  shall  exercise  the  powers  and 
duties  appertaining  to  the  office  of  chairman  in  the 
organization  of  such  Federal  Reserve  bank. 

No  senator  or  representative  in  Congress  shall  be 
a  member  of  the  Federal  Reserve  Board  or  an  officer 
or  a  director  of  a  Federal  Reserve  bank. 

No  director  of  class  B  shall  be  an  officer,  director, 
or  employee  of  any  bank. 

No  director  of  class  B  shall  be  an  officer,  director, 
employee,  or  stockholder  of  any  bank. 

Directors  of  class  A  and  class  B  shall  be  chosen  in 
the  following  manner: 

The  Federal  Reserve  Board  shall  classify  the 
member  banks  of  the  district  into  three  general 
groups  or  divisions,  designating  each  group  by 
number.  Each  group  shall  consist  as  nearly  as  may 
be  of  banks  of  similar  capitalization.  Each  member 


178  BANKING,  CREDIT  AND  FINANCE 

bank  shall  be  permitted  to  nominate  to  the  chairman 
of  the  board  of  directors  of  the  Federal  Reserve  bank 
of  the  district  one  candidate  for  director  of  class  A 
and  one  candidate  for  director  of  class  B.  The  candi- 
date so  nominated  shall  be  listed  by  the  chairman, 
indicating  by  whom  nominated,  and  a  copy  of  said 
list  shall,  within  fifteen  days  after  its  completion, 
be  furnished  by  the  chairman  to  each  member  bank. 
Each  member  bank  by  a  resolution  of  the  board  or 
by  an  amendment  to  its  by-laws  shall  authorize  its 
president,  cashier,  or  some  other  officer  to  cast  the 
vote  of  the  member  bank  in  the  elections  of  class  A 
and  class  B  directors. 

Class  C  directors  shall  be  appointed  by  the  Federal 
Reserve  Board.  They  shall  have  been  for  at  least 
two  years  residents  of  the  district  for  which  they  are 
appointed,  one  of  whom  shall  be  designated  by  said 
board  as  chairman  of  the  board  of  directors  of  the 
Federal  Reserve  bank  and  as  *' Federal  reserve 
agents."  He  shall  be  a  person  of  tested  banking  ex- 
perience, and  in  addition  to  his  duties  as  chairman 
of  the  board  of  directors  of  the  Federal  Reserve  bank 
he  shall  be  required  to  maintain,  under  regulations 
to  be  established  by  the  Federal  Reserve  Board,  a 
local  office  of  said  board  on  the  premises  of  the  Feder- 
al Reserve  Bank.  He  shall  make  regular  reports  to 
the  Federal  Reserve  Board  and  shall  act  as  its  official 
representative  for  the  performance  of  the  functions 
conferred  upon  it  by  this  act. 

§  208.  Dividends  and  Franchise  Tax. — The  cap- 
ital stock  of  each  Federal  Reserve  bank  shall  be 
divided  into  shares  of  $100  each.  The  outstanding 
capital  stock  shall  be  increased  from  time  to  time  as 


THE  FEDERAL  RESERVE  SYSTEM  179 

member  banks  increase  their  capital  stock  and  sur- 
plus or  as  additional  banks  become  members,  and 
may  be  decreased  as  member  banks  reduce  their 
capital  stock  or  sui-plus  or  cease  to  be  members. 
Shares  of  the  capital  stock  of  Federal  Reserve  banks 
owned  by  member  banks  shall  not  be  transferred  or 
hypothecated. 

After  all  necessary  expenses  of  a  Federal  reserve 
bank  have  been  paid  or  provided  for,  the  stockholders 
shall  be  entitled  to  receive  an  annual  dividend  of 
six  per  centum  on  the  paid-in  capital  stock,  which 
dividend  shall  be  cumulative.  After  the  aforesaid 
dividend  claims  have  been  fully  met,  the  net  earn- 
ings shall  be  paid  to  the  United  States  as  a  franchise 
tax. 

The  net  earnings  derived  by  the  United  States  from 
Federal  Reserve  banks  shall,  in  the  discretion  of  the 
Secretary,  be  used  to  supplement  the  gold  reserve 
held  against  outstanding  United  States  notes,  or  shall 
be  applied  to  the  reduction  of  the  outstanding  bonded 
indebtedness  of  the  United  States  under  regulations 
to  be  prescribed  by  the  Secretary  of  the  Treasury. 

§  209.  Nationalization  of  State  Banks. — Section 
5154,  United  States  Revised  Statutes,  is  hereby 
amended  to  read  as  follows: 

Any  bank  incorporated  by  special  law  of  any  State 
or  of  the  United  States  or  organized  under  the  gen- 
eral laws  of  any  State  of  the  United  States  and  hav- 
ing an  unimpaired  capital  sufficient  to  entitle  it  to 
become  a  national  banking  association  under  the 
provisions  of  the  existing  law^s  may,  by  the  vote  of 
the  shareholders  owning  not  less  than  fifty-one  per 


180  BANKING,  CREDIT  AND  FINANCE 

centum  of  tlie  capital  stock  of  sueh  bank  or  banking 
association,  with  the  approval  of  the  Comptroller 
of  the  Currency  be  converted  into  a  national  banking 
association,  with  any  name  approved  by  the  Comp- 
troller of  the  Currency:  Provided,  however,  That 
said  conversion  shall  not  be  in  contravention  of  the 
State  law. 

When  the  Comptroller  has  given  to  such  bank  or 
banking  association  a  certificate  that  the  provisions 
of  this  Act  have  been  complied  with,  such  bank  or 
banking  association,  and  all  its  stocldiolders,  officers, 
and  employees,  shall  have  the  same  powers  and 
privileges,  and  shall  be  subject  to  the  same  duties, 
liabilities,  and  regulations,  in  all  respects,  as  shall 
have  been  prescribed  by  the  Federal  Reserve  Act 
and  by  the  national  banking  Act  for  associations 
originally  organized  as  national  banking  associations. 

§  210.  State  Banks  as  Members. — Any  bank  in- 
corporated by  special  law  of  any  State,  or  organized 
under  the  general  laws  of  any  State  or  of  the  United 
States,  desiring  to  become  a  member  of  the  Federal 
Keserve  System,  may  make  application  to  the  Feder- 
al Reserve  Board,  under  such  rules  and  regulations 
arj  it  may  prescribe,  for  the  right  to  subscribe  to  the 
stock  of  the  Federal  Reserve  bank  organized  within 
the  district  in  which  the  applying  bank  is  located. 
Such  application  shall  be  for  the  same  amount  of 
stock  that  the  applying  bank  would  be  required  to 
subscribe  to  as  a  national  bank.  The  Federal  Re- 
serve Board,  subject  to  such  conditions  as  it  may 
pwiscnbe,  may  permit  the  applying  bank  to  become 
a  stockholder  of  such  Federal  Reserve  bank. 

In  acting  upon  such  applications  the  Federal  Re- 


d 


THE  FEDERAL  RESERVE  SYSTEM  181 

serve  Board  shall  consider  the  financial  condition  of 
the  applying  bank,  the  general  character  of  its 
management,  and  whether  or  not  the  corporate 
powers  exercised  are  consistent  with  the  purpose  of 
this  act. 

Whenever  the  Federal  Reserve  Board  shall  permit 
the  applying  bank  to  become  a  stockholder  in  the 
Federal  Reserve  bank  of  the  district  its  stock  sub- 
scription shall  be  payable  on  call  of  the  Federal  Re- 
serve Board,  and  stock  issued  to  it  shall  be  held 
subject  to  the  provisions  of  this  act. 

As  a  condition  of  membership  such  banks  shall 
likewise  be  subject  to  examinations  made  by  direc- 
tion of  the  Federal  Reserve  Board  or  of  the  Federal 
Reserve  bank  by  examiners  selected  or  approved  by 
the  Federal  Reserve  Board. 

Whenever  the  directors  of  the  Federal  Reserve 
bank  shall  approve  the  examinations  made  by  the 
State  authorities,  such  examinations  and  the  reports 
thereof  may  be  accepted  in  lieu  of  examinations  made 
by  examiners  selected  or  approved  by  the  Federal 
Reserve  Board:  Provided,  however,  That  when  il; 
deems  it  necessary  the  board  may  order  special  ex- 
aminations by  examiners  of  its  own  selection  and 
shall  in  all  cases  approve  the  form  of  the  report.  The 
expenses  of  all  examinations,  other  than  those  made 
by  State  authorities,  shall  be  assessed  against  and 
paid  by  the  banks  examined. 

§  211.  Federal  Reserve  Board. — A  Federal  Re- 
serve Board  is  hereby  created  which  shall  consist 
of  seven  members  including  the  Secretary  of  the 
Treasury  and  the  Comptroller  of  the  Currency,  who 


182  BANKING,  CREDIT  AND  FINANCE 

shall  be  members  ex  officio,  and  five  members  ap- 
pointed by  the  President  of  the  United  States,  by  and 
with  the  advice  and  consent  of  the  Senate.  The  five 
members  of  the  Federal  Reserve  Board  appointed 
by  the  President  and  confirmed  as  aforesaid  shall 
devote  their  entire  time  to  the  business  of  the  Federal 
Reserve  Board  and  shall  each  receive  an  annual 
salary  of  $12,000,  payable  monthly  together  with 
actual  necessary  traveling  expenses,  and  the  Comp- 
troller of  the  Currency,  as  ex  officio  member  of  the 
Federal  Reserve  Board,  shall,  in  addition  to  the 
salary  now  paid  him  as  Comptroller  of  the  Currency, 
receive  the  sum  of  $7,000  annually  for  his  services 
as  a  member  of  said  board. 

Of  the  five  members  thus  appointed  by  the  Presi- 
dent at  least  two  shall  be  persons  experienced  in 
banking  or  finance.  One  shall  be  designated  by  the 
President  to  serve  for  two,  one  for  four,  one  for  six, 
one  for  eight,  and  one  for  ten  years,  and  thereafter 
each  member  so  appointed  shall  serve  for  a  term  of 
ten  years  unless  sooner  removed  for  cause  by  the 
President.  Of  the  five  persons  thus  appointed  one 
shall  be  designated  by  the  President  as  governor  and 
one  as  vice  governor  of  the  Federal  Reserve  Board. 
The  governor  of  the  Federal  Reserve  Board,  subject 
to  its  supervision  shall  be  the  active  executive  officer. 

§  212.  Powers  of  the  Board.— The  Federal  Re- 
serve Board  shall  be  authorized  and  empowered: 

(a)  To  examine  at  its  discretion  the  accounts, 
books  and  affairs  of  each  Federal  Reserve  bank  and 
of  each  member  bank  and  to  require  such  statements 
and  reports  as  it  may  deem  necessary.  The  said 
board  shall  publish  once  each  week  a  statement  show- 


THE  FEDERAL  RESERVE  SYSTEM  183 

ing  the  condition  of  each  Federal  Reserve  bank  and 
a  consolidated  statement  for  all  Federal  Reserve 
banks. 

(b)  To  permit,  or,  on  the  affirmative  vote  of  at 
least  five  members  of  the  Reserve  banks  to  redis- 
count the  discount  paper  of  other  Federal  Reserve 
banks  at  rates  of  interest  to  be  fixed  by  the  Federal 
Reserve  Board. 

(c)  To  suspend  for  a  period  not  exceeding  thirty 
days,  and  from  time  to  time  to  renew  such  suspension 
for  periods  not  exceeding  fifteen  days,  any  reserve 
requirements  specified  in  this  Act. 

(d)  To  supervise  and  regulate  through  the  bureau 
under  the  charge  of  the  Comptroller  of  the  Currency 
the  issue  and  retirement  of  Federal  reserve  notes, 
and  to  prescribe  rules  and  regulations  under  which 
such  notes  may  be  delivered  by  the  Comptroller  to 
the  Federal  reserve  agents  applying  therefor. 

(e)  To  add  to  the  number  of  cities  classified  as 
reserve  and  central  reserve  cities  under  existing  law 
in  which  national  banking  associations  are  subject 
to  the  reserve  requirements  set  forth  in  this  Act;  or 
to  reclassify  existing  reserve  and  central  reserve 
cities  or  to  terminate  their  designation  as  such. 

(f )  To  suspend  or  remove  any  officer  or  director 
of  any  Federal  Reserve  bank. 

(g)  To  require  the  writing  off  of  doubtful  or 
worthless  assets  upon  the  books  and  balance  sheets 
of  Federal  Reserve  banks. 

(h)  To  suspend,  for  the  violation  of  any  of  the 
provisions  of  this  Act,  the  operations  of  any  Federal 
Reserve  bank,  to  take  possession  thereof,  administer 


184  BANKING,  CREDIT  AND  FINANCE 

the  same  during  the  period  of  suspension,  and,  when 
deemed  advisable,  to  liquidate  or  reorganize  such 
bank. 

(i)  To  require  bonds  of  Federal  reserve  agents, 
to  make  regulations  for  the  safeguarding  of  all  col- 
lateral, bonds,  Federal  reserve  notes,  money  or  prop- 
erty of  any  kind  deposited  in  the  hands  of  such 
agents. 

(j)  To  exercise  general  supervision  over  said 
Federal  Reserve  banks. 

(k)  To  grant  by  special  permit  to  national  banks 
applying  therefor,  when  not  in  contravention  of 
State  or  local  law,  the  right  to  act  as  trustee, 
executor,  administrator,  registrar  of  stocks  and 
bonds,  guardian  of  estates,  assignee,  receiver,  com- 
mittee of  estates  of  lunatics,  or  in  any  other  fiduci- 
ary capacity  in  which  State  banks,  trust  companies, 
or  other  corporations  which  come  into  competition 
with  national  banks  are  permitted  to  act  under  the 
laws  of  the  State  in  which  the  national  bank  is 
located. 

(1)  To  employ  such  attorneys,  experts,  assist- 
ants, clerks,  or  other  employees  as  may  be  deemed 
necessary  to  conduct  the  business  of  the  board. 

§  213.  Federal  Advisory  Council. — There  is  here- 
by created  a  Federal  Advisory  Council,  which  shall 
consist  of  as  many  members  as  there  are  Federal 
Reserve  districts.  Each  Federal  Reserve  bank  by 
its  board  of  directors  shall  annually  select  from  its 
own  Federal  Reserve  district  one  member  of  said 
council,  who  shall  receive  such  compensation  and 
allowances  as  may  be  fixed  by  his  board  of  directors 


THE  FEDERAL  RESERVE  SYSTEM  185 

subject  to  the  approval  of  the  Federal  Reserve  Board. 
The  meetings  of  said  advisory  council  shall  be  held 
at  Washingaon,  District  of  Columbia,  at  least  four 
times  year,  and  oftener  if  called  by  the  Federal  Re- 
serve Board. 

The  Federal  Advisory  Council  shall  have  power, 
by  itself  or  through  its  officers,  (1)  to  confer  directly 
with  the  Federal  Reserve  Board  on  general  business 
conditions;  (2)  to  make  oral  or  written  representa- 
tions concerning  matters  within  the  jurisdiction  of 
said  board;  (3)  to  call  for  information  and  to  make 
recommendations  in  regard  to  discount  rates,  redis- 
count business,  note  issues,  reserve  conditions  in  the 
various  districts  the  purchase  and  sale  of  gold  or  se- 
curities by  reserve  banks,  open-market  operations 
by  said  banks,  and  the  general  affairs  of  the  reserve 
banking  system. 

§  214.    Powers  of  Federal  Reserve  Banks. — Any 

Federal  reserve  bank  may  receive  from  any  of  its 
member  banks,  and  fi'om  the  United  States,  deposits 
of  current  funds  in  lawful  money,  national-bank 
notes,  Federal  Reserve  notes,  or  checks,  and  drafts, 
payable  upon  presentation,  and  also,  for  collection, 
maturing  notes  and  bills;  or,  solely  for  purposes  of 
exchange  or  of  collection,  may  receive  from  other 
Federal  Reserve  banks  deposits  of  current  funds 
in  lawful  money,  national-bank  notes,  or  checks 
upon  other  Federal  Reserve  banks,  and  checks  and 
drafts,  payable  upon  presentation  within  its  district, 
and  maturing  notes  and  bills  payable  within  its 
district;  or,  solely  for  the  purposes  of  exchange  or 
of  collection,  may  receive  from  any  non  member 
bank  or  trust  company  deposits  of  current  funds  in 


186  BANKING,  CREDIT  AND  FINANCE 

lawful  money,  national-bank  notes,  Federal  reserve 
notes,  checks  and  drafts  payable  upon  presentation, 
or  maturing  notes  and  bills:  Provided,  Such  non 
member  bank  or  trust  company  maintains  with  the 
Federal  Reserve  bank  of  its  district  a  balance  suffi- 
cient to  offset  the  items  in  transit  held  for  its  account 
by  the  Federal  Reserve  bank. 

§  215.  Discount  of  Commercial  Paper. — Upon  the 
indorsement  of  any  of  its  member  banks,  which  shall 
be  deemed  a  waiver  of  demand,  notice  and  protest 
by  such  bank  as  to  its  own  indorsement  exclusively, 
any  Federal  Reserve  bank  may  discount  notes,  drafts 
and  bills  of  exchange  arising  out  of  actual  commer- 
cial transactions;  that  is,  notes,  drafts,  and  bills  of 
exchange  issued  or  drawn  for  agricultural,  indus- 
trial, or  commercial  purposes,  or  the  proceeds  of 
which  have  been  used,  or  are  to  be  used,  for  such 
purposes,  the  Federal  Reserve  Board  to  have  the 
right  to  determine  or  define  the  charter  of  the  paper 
thus  eligible  for  discount,  within  the  meaning  of 
this  Act.  Nothing  in  this  Act  contained  shall  be  con- 
strued to  prohibit  such  notes,  drafts,  and  bills  of  ex- 
change secured  by  staple  agricultural  products,  or 
other  goods,  wares,  or  merchandise  from  being  eligi- 
ble for  such  discount;  but  such  definition  shall  not 
include  notes,  drafts,  or  bills  covering  merely  invest- 
ments or  issued  or  drawn  for  the  purpose  of  carry- 
ing or  trading  in  stocks,  bonds,  or  other  investment 
securities,  except  bonds  and  notes  of  the  Government 
of  the  United  States.  Notes,  drafts,  and  bills  admit- 
ted to  discount  under  the  terms  of  this  paragraph 
must  have  a  maturity  at  the  time  of  discount  of  not 
more  than  ninety  days,  exclusive  of  days  of  grace: 


THE  FEDERAL  RESERVE  SYSTEM  187 

Provided,  That  notes,  drafts,  and  bills  drawn  or 
issued  for  agricultural  purposes  or  based  on  live 
stock  and  having  a  maturity  not  exceeding  six 
months,  exclusive  of  days  of  grace,  may  be  discounted 
in  an  amount  to  be  limited  to  a  percentage  of  the 
assets  of  the  Federal  Reserve  bank,  to  be  ascertained 
and  fixed  by  the  Federal  Reserve  Board. 

The  aggregate  of  such  notes,  drafts,  and  bills  bear- 
ing the  signature  or  indorsement  of  any  one  bor- 
rower, whether  a  person,  company,  firm,  or  corpora- 
tion, rediscounted  for  any  one  bank  shall  at  no  time 
exceed  ten  per  centum  of  the  unimpaired  capital  and 
surplus  of  said  bank;  but  this  restriction  shall  not 
apply  to  the  discount  of  bills  of  exchange  drawn  in 
good  faith  against  actually  existing  values. 

§  216.  Advances  to  Member  Banks. — Any  Fed- 
eral Reserve  bank  may  make  advances  to  its  member 
banks  on  their  promissory  notes  for  a  period  not 
exceeding  fifteen  days  at  rates  to  be  established  by 
such  Federal  Reserve  banks  subject  to  the  review 
and  determination  of  the  Federal  Reserve  Board, 
provided  such  notes,  drafts,  bills  of  exchange,  or 
bankers'  acceptances  as  are  eligible  for  rediscount 
or  for  purchase  by  Federal  Reserve  banks  under  the 
provisions  of  this  Act,  or  by  the  deposit  or  pledge 
of  bonds  or  notes  of  the  United  States. 

§  217.  Government  Deposits. — The  money  held 
in  the  general  fund  of  the  Treasury,  except  the  five 
per  centum  fund  for  the  redemption  of  outstanding 
national-bank  notes  and  the  funds  provided  in  this 
Act  for  the  redemption  of  Federal  reserve  notes 
may,  upon  the  direction  of  the  Secretary  of  the  Treas- 


188  BANKING,  CREDIT  AND  FINANCE 

ury,  be  deposited  in  Federal  Reserve  banks,  which 
banks,  when  required  by  the  Secretary  of  the  Treas- 
ury, shall  act  as  fiscal  agents  of  the  United  States: 
and  the  revenues  of  the  Government  or  any  part 
thereof  may  be  deposited  in  such  banks,  and  disburse- 
ments may  be  made  by  checks  drawn  against  such 
deposits. 

No  public  fimds  of  the  Philippine  Islands,  or  of 
the  postal  savings  or  any  Government  funds,  shall 
be  deposited  in  the  continental  United  States  in  any 
bank  not  belonging  to  the  system  established  by  this 
Act:  Provided,  however.  That  nothing  in  this  Act 
shall  be  construed  to  deny  the  right  of  the  Secretary 
of  the  Treasury  to  use  member  banks  as  depositories. 

§  218.  Note  Issues. — Federal  reserve  notes,  to  be 
issued  at  the  discretion  of  the  Federal  Reserve 
Board  for  the  pui-pose  of  making  advances  to  Federal 
Reserve  banks  through  the  Federal  reserve  agents 
as  hereinafter  set  forth  and  for  no  other  purpose, 
are  hereby  authorized.  The  said  notes  shall  be  obli- 
gations of  the  United  States  and  shall  be  receivable 
hj  all  national  and  member  banks  and  Federal  Re- 
serve banks  and  for  all  taxes,  customs,  and  other 
public  dues.  They  shall  be  redeemed  in  gold  on  de- 
mand at  the  Treasury  Department  of  the  United 
States,  in  the  city  of  Washington,  District  of  Col- 
mnbia,  or  in  gold  or  lawful  money  at  any  Federal  re- 
serve bank. 

Any  Federal  Reserve  bank  may  make  application 
to  the  local  Federal  reserve  agent  for  such  amount 
of  the  Federal  reserve  notes  hereinbefore  provided 
for  as  it  may  require.  Such  application  shall  be  ac- 
companied with  a  tender  to  the  local  Federal  resei've 


THE  FEDERAL  RESERVE  SYSTEM  189 

agent  of  collateral  in  amount  equal  to  the  sum  of 
the  Federal  reserve  notes  thus  applied  for  and  issued 
pursuant  to  such  application. 

§  219.  Reserves  to  Be  Maintained. — Every  Fed- 
eral Reserve  bank  shall  maintain  resei*ves  in  gold 
or  lawful  money  of  not  less  than  thirty-five  per  cent- 
mn  against  its  deposits  and  reserves  in  gold  of  not 
less  than  forty  per  centum  against  its  Federal  re- 
serve notes  in  actual  circulation:  Provided,  how- 
ever, That  when  the  Federal  reserve  agent  holds 
gold  certificates  as  collateral  for  Federal  reserve 
nofes  issued  to  the  bank  such  gold  or  gold  certificates 
shall  be  counted  as  part  of  the  gold  reserve  which 
such  bank  is  required  to  maintain  against  its  Fed- 
eral reserve  notes  in  actual  circulation. 

The  Federal  Reserve  Board  shall  require  each  Fed- 
eral Reserve  bank  to  maintain  on  deposit  in  the 
Treasury  of  the  United  States  a  sum  in  gold  suffi- 
cient in  the  judgment  of  the  Secretary  of  the  Trea.^- 
ury  for  the  redemption  of  the  Federal  reserve  notes 
issued  to  such  banks,  but  in  no  event  less  than  five  per 
centum  of  the  total  amount  of  notes  issued  less  the 
amoimt  of  gold  or  gold  certificates  held  by  the  Fed- 
eral reserve  agent  as  collateral  security;  but  such 
deposit  of  gold  shall  be  counted  and  included  as 
part  of  the  forty  per  centum  reserve  hereinbefore 
required. 

§  220.  Notes  for  Circulation. — In  order  to  furnish 
suitable  notes  for  circulation  as  Federal  reserve  notes, 
the  Comptroller  of  the  Currency  shall,  under  the 
Secretary  of  the  Treasury,  cause  plates  and  dies  to 
be  engraved  in  the  best  manner  to  guard  against 


190  BANKING,  CREDIT  AND  FINANCE 

counterfeits  and  fraudulent  alterations,  and  shall 
have  printed  therefrom  and  numbered  such  quanti- 
ties of  such  notes  of  the  denominations  of  $5,  $10, 
$20,  $50,  $100,  $500,  $1000,  $5000,  $10,000  as  may  be 
required  to  supply  the  Federal  Reserve  banks.  Such 
notes  shall  be  in  form  and  tenor  as  directed  by  the 
Secretary  of  the  Treasury  under  the  provisions  of 
this  Act  and  shall  bear  the  distinctive  numbers  of 
the  several  Federal  Reserve  banks  through  which 
they  are  issued. 

When  such  notes  have  been  prepared  they  shall 
be  deposited  in  the  Treasury,  or  in  the  subtreasury 
or  mint  of  the  United  States  nearest  the  place  of 
business  of  each  Federal  Reserve  bank  and  shall  be 
held  for  the  use  of  such  bank  subject  to  the  order  of 
the  Comptroller  of  the  Currency  for  their  delivery, 
as  provided  by  this  Act. 

So  much  of  the  provisions  of  section  5159  of  the 
Revised  Statutes  of  the  United  States,  and  section 
4  of  the  act  of  June  20, 1874,  and  section  8  of  the  act 
of  July  12, 1882,  and  of  any  other  provisions  of  exist- 
ing statutes  as  require  that  before  any  national  bank- 
ing association  shall  be  authorized  to  commence 
banking  business  it  shall  transfer  and  deliver  to  the 
Treasurer  of  the  United  States  a  stated  amount  of 
United  States  registered  bonds,  and  so  much  of 
those  provisions  or  of  any  other  provisions  of  exist- 
ing statutes  as  require  any  national  banking  associa- 
tion now  or  hereafter  organized  to  maintain  a  mini- 
mum deposit  of  such  bonds  with  the  Treasurer  is 
hereby  repealed. 


I 


THE  FEDERAL  RESERVE  SYSTEM  191 

Note. — Under  act  of  April  23,  1918,  Federal  reserve  banks  may 
issue  Federal  reserve  bank  notes  in  any  denominations,  including  $1 
and  $2,  against  the  security  of  United  States  certificates  of  indebted- 
ness to  the  extent  permitted  by  that  act. 

§  221.  Bank  Reserves. — Demand  deposits  with- 
in the  meaning  of  this  Act  shall  comprise  all  deposits 
payable  within  thirty  days,  and  time  deposits  shall 
comprise  all  deposits  payable  after  thirty  days,  all 
savings  accounts  and  certificates  of  deposit  which  are 
subject  to  not  less  than  thirty  days'  notice  before 
payment,  and  all  postal  savings  deposits. 

Every  bank,  banking  association,  or  trust  com- 
pany which  is  or  which  becomes  a  member  of  any 
Federal  Reserve  bank  shall  establish  and  maintain 
reserve  balances  with  its  Federal  Reserve  bank  as 
follows: 

(a)  If  not  in  a  reserve  or  central  reserve  city, 
as  now  or  hereafter  defined,  it  shall  hold  and  main- 
tain with  the  Federal  Reserve  bank  of  its  district  an 
actual  net  balance  equal  to  not  less  than  seven  per 
centum  of  the  aggregate  amount  of  its  demand  de- 
posits and  three  per  centum  of  its  time  deposits. 

(b)  If  in  a  reserve  city,  as  now  or  hereafter  de- 
fined, it  shall  hold  and  maintain  with  the  Federal 
Reserve  bank  of  its  district  an  actual  net  balance 
equal  to  not  less  than  ten  per  centum  of  the  aggre- 
gate amount  of  its  demand  deposits  and  three  per 
centum  of  its  time  deposits. 

(c)  If  in  a  central  reserve  city,  as  now  or  here- 
after defined,  it  shall  hold  and  maintain  with  the 
Federal  Reserve  bank  of  its  district  an  actual  net 
balance  equal  to  not  less  than  thirteen  per  centum 
of  the  aggregate  amount  of  its  demand  deposits  and 
three  per  centum  of  its  time  deposits. 


192  BANKING,  CREDIT  AND  FINANCE 

§  222.  Bank  Examinations.  —  Section  5240, 
United  States  Reserve  Statutes,  is  amended  to  read 
as  follows: 

"The  Comptroller  of  the  Currency,  with  the  ap- 
proval of  the  Secretary  of  the  Treasmy,  shall  appoint 
examiners  who  shall  examine  every  member  bank 
at  least  twice  in  each  calendar  year  and  oftener  if 
considered  necessary:  Provided,  however,  That  the 
Federal  Reserve  Board  may  authorize  examination 
by  the  State  authorities  to  be  accepted  in  the  case 
of  State  banks  and  trust  companies  and  may  at  any 
time  direct  the  holding  of  a  special  examination  of 
State  banks  or  trust  companies  that  are  stockholders 
in  any  Federal  Reserve  bank.  The  examiner  mak- 
ing the  examination  of  any  national  bank,  or  of  any 
other  member  bank,  shall  have  power  to  make  a 
thorough  examination  of  all  the  affairs  of  the  bank, 
and  in  doing  so  shall  have  power  to  administer  oaths 
and  to  examine  any  of  the  officers  and  agents  thereof 
under  oath  and  shall  make  a  full  and  detailed  report 
of  the  condition  of  said  bank  to  the  Comptroller  of 
the  Currency. 

The  Federal  Reserve  Board  shall,  at  least  once 
each  year,  order  an  examination  of  each  Federal 
Reserve  bank,  and  upon  joint  application  of  ten 
member  banks  the  Federal  Reserve  Board  shall  order 
a  special  examination  and  report  of  the  condition  of 
any  Federal  Reserve  bank. 

§  223.  Loans  on  Farm  Lands. — Any  national 
banking  association  not  situated  in  a  central  reserve 
city  may  make  loans  secured  by  improved  and  un- 
encumbered faiTn  land  situated  within  its  Federal 


THE  FEDERAL  RESERVE  SYSTEM  193 

Reserve  district  or  within  a  radius  of  one  hundred 
miles  of  the  place  in  which  such  bank  is  located, 
irrespective  of  district  lines,  and  may  also  make 
loans  secured  by  improved  and  unencumbered  real 
estate  located  within  one  hundred  miles  of  the  place 
in  which  such  bank  is  located,  irrespective  of  district 
lines;  but  no  loan  made  upon  the  security  of  such 
farm  land  shall  be  made  for  a  longer  time  than  five 
years,  and  no  loan  made  upon  the  security  of  such 
real  estate  as  distinguished  from  farm  land  shall  be 
made  for  a  longer  time  than  one  year,  nor  shall  the 
amount  of  any  such  loan,  whether  upon  such  farm 
land  or  upon  such  real  estate,  exceed  fifty  per  centum 
of  the  actual  value  of  the  property  offered  as  secur- 
ity. Any  such  bank  may  make  such  loans,  whether 
secured  by  such  farm  land  or  such  real  estate,  in  an 
aggTegate  sum  equal  to  twenty-five  per  centum  of 
its  capital  and  surplus  or  to  one-third  of  its  time 
deposits,  and  such  banks  may  continue  hereafter  as 
heretofore  to  receive  time  deposits  and  to  pay  in- 
terest on  the  same. 

§  224.  Foreign  Branches. — Any  national  banking 
association  possessing  a  capital  and  surplus  of  $1,- 
000,000  or  more  may  file  application  with  the  Federal 
Reserve  Board  for  permission  to  exercise,  upon  such 
conditions  and  under  such  regulations  as  may  be 
prescribed  by  the  said  board,  either  or  both  of  the 
following  powers: 

First.  To  establish  branches  in  foreign  countries 
or  dependencies  or  insular  possessions  of  the  United 
States  for  the  furtherance  of  the  foreign  commerce 
of  the  United  States,  and  to  act  if  required  to  do  so 
as  fiscal  agents  of  the  United  States. 


194  BANKING,  CREDIT  AND  FINANCE 

Second.  To  invest  an  amount  not  exceeding  in  the 
aggregate  ten  per  centum  of  its  paid-in  capital  stock 
and  surplus  in  the  stock  of  one  or  more  banks  or  cor- 
porations chartered  or  incorporated  under  the  laws 
of  the  United  States  or  of  any  State  thereof,  and 
principally  engaged  in  international  or  foreign  bank- 
ing, or  banking  in  a  dependency  or  insular  posses- 
sion of  the  United  States  either  directly  or  through 
the  agency,  ownership,  or  control  of  local  institu- 
tions in  foreign  countries,  or  in  such  dependencies 
or  insular  possessions. 

§  225.  Gold  Standard  Maintained. — All  Provi- 
sions of  law  inconsistent  with  or  superseded  by  any 
of  the  provisions  of  this  Act  are  to  that  extent 
and  to  that  extent  only  hereby  repealed:  Provided, 
Nothing  in  this  Act  contained  shall  be  construed  to 
repeal  the  parity  provision  or  provisions  contained 
in  an  Act  approved  March  14,  1900,  entitled  *'An 
Act  to  define  and  fix  the  standard  of  value  to  main- 
tain the  parity  of  all  forms  of  money  issued  of  coined 
by  the  United  States,  to  refund  the  public  debt,  and 
for  other  purposes,"  and  the  Secretary  of  the  Treas- 
ury, may  for  the  purpose  of  maintaining  such  parity 
and  to  strengthen  the  gold  reserve,  borrow  gold  on 
the  security  of  United  States  bonds  authorized  by 
section  two  of  the  Act  last  referred  to  or  for  one-year 
gold  notes  bearing  interest  at  a  rate  of  not  to  exceed 
three  per  centum  per  annum,  or  sell  the  same  if  neces- 
sary to  obtain  gold.  When  the  funds  of  the  Treasmy 
on  hand  justify,  he  may  purchase  and  retire  such 
outstanding  bonds  and  notes. 

§  226.  Federal  Reserve  Bank  Earnings, — The 
Federal  Reserve  Act  wisely  permits  each  Federal 


THE  FEDERAL  RESERVE  SYSTEM  195 

Reserve  Bank  to  accumulate  a  surplus  fund  out  of  its 
earnings  equal  to  100  per  cent  of  its  subscribed 
capital,  before  the  franchise  tax  becomes  payable. 
This  provision  probably  will  avoid  the  necessity  of 
payment  of  the  remaining  50  per  cent  on  stock  sub- 
scriptions of  member  banks  not  yet  called  in.  But 
after  the  100  per  cent  surplus  is  accumulated  and  6 
per  cent  in  dividends  is  paid  annually  on  paid-in 
capital  stock,  90  per  cent  of  net  profits  remaining 
must  be  paid  in  to  the  already  existing  surplus. 

Large  earnings  are  possible  because  of  the  ability 
of  the  Federal  Reserve  Bank  to  rediscount  in  large 
volume  for  its  member  banks,  due  to  needs  of  agri- 
culture, commerce  and  industry.  This  ability  to  re- 
discount in  large  volume  is  primarily  based  on  the 
power  granted  by  law  to  issue  Federal  Reserve  notes 
in  payment  for  the  proceeds  of  those  rediscounts. 

But  the  Federal  Reserve  note  is  the  promise  of  the 
United  States  to  pay  to  the  bearer,  on  demand,  so 
many  dollars.  Therefore  the  Federal  Reserve  Bank 
itself  really  borrows  credit  from  the  government  in 
the  form  of  Federal  Reserve  notes,  distributes  this 
credit  among  its  member  banks  as  their  needs  re- 
quire, and  virtually  pays  interest  to  the  government, 
in  the  form  of  franchise  tax,  to  the  amount  of  90  per 
cent  of  its  net  earnings  above  dividend  requirements, 
whether  those  earnings  be  large  or  small.  The  Fed- 
eral Reserve  agent  at  each  Federal  Reserve  Bank 
holds  collateral  in  the  form  of  gold  or  commercial 
paper  to  secure  the  government  for  the  notes  issued 
in  his  district. 

Moreover,  the  Federal  Reserve  Act  specifies  that 
the  Secretary  of  the  Treasury  may  disburse  the  pro- 


196  BANKING,  CREDIT  AND  FINANCE 

ceeds  of  the  franchise  tax  only  by  increasing  the 
gold  reserve  against  U.  S.  notes  (greenbacks),  for 
which  ample  reserve  already  has  been  provided,  or 
employ  it  for  the  retirement  of  funded  obligations 
of  the  United  States.  It  is  probable,  therefore,  that 
the  entire  franchise  tax  will  be  applied  toward  the 
payment  of  Liberty  bonds  and  Victory  notes  before 
their  maturity,  thus  returning  directly  to  the  public 
90  per  cent  of  the  profits  to  which  it  contributed, 
and  which  there  is  some  disposition  to  criticize. 

§  227.  Example. — The  net  earnings  of  the  Fed- 
eral Reserve  Bank  of  Chicago  for  1920  were  distrib- 
uted as  follows: 

Dividends  $     792,769.21 

Transferred  to  Surplus 14,688,499.56 

Franchise  Tax   (paid  to  govern- 
ment)      10,394,480.26 

Total $25,875,749.03 

Now  observe  these  figures  of  the  Federal  Reserve 
Bank  of  Chicago  covering  its  operations  during 
1920: 

Paid-in  Capital,  average $  13,267,000 

Member  Bank  reserves,  average.—  258,457,176 
Federal  Reserve  notes  in  circula- 
tion, average  $531,074,275 

and  it  will  be  noted  that  practically  two-thirds  of  its 
actual  working  power  was  in  the  form  of  Federal 
Reserve  notes  or  borrowed  government  credit.  Hence 
the  return  (in  franchise  tax  guise)  to  the  govern- 
ment was  a  very  modest  one,  even  on  the  volume  of 
circulation  (54.8  per  cent,  or  $290,769,761.00)  not  di- 


THE  FEDERAL  RESERVE  SYSTEM  197 

rectly  covered  by  gold;  yet  the  government  received 
all  the  profits  above  surplus  and  dividend  require- 
ments. The  direct  benefits  accruing  to  the  banks  of 
the  district  and  through  them  to  the  business  public 
were  very  large  by  comparison. 

§  228.    Banking  Power  of  the  United  States.— 

The  banking  power  of  the  United  States  in  June, 
1919,  as  represented  by  capital,  suiplus  and  other 
profits,  circulation  and  deposits  of  national  and  other 
reporting  banks,  together  with  the  estimated  amount 
of  funds  of  this  character  in  nonreporting  banks,  as 
well  as  the  paid-in  capital,  government  and  reserve 
deposits,  and  Federal  reserve  notes  in  circulation  as 
shown  by  the  statement  of  the  Federal  Reserve  banks 
as  of  June  30,  1919,  was  $45,756,300,000. 

The  banking  power  of  the  United  States  alone  to- 
day is  three  times  as  great  as  the  banking  power  of 
the  world  as  it  stood  in  1890,  when  Mulhall's  esti- 
mate placed  the  world's  banking  power  at  $15,585,- 
000,000,  and  the  banking  power  of  the  United  States 
is  now  about  nine  times  greater  than  MuThalPs  esti- 
mate of  our  banking  power  in  1890,  which  was  given 
by  him  at  $5,150,000,000. 

*Total  (1919) 

National  banks  $16,090,100,000 

State  (etc.)  banks  23,810,700,000 

Nonreporting  banks  610,200,000 

Federal  Reserve  banks 5,245,300.000 

Total $45,756,300,000 

*Capital  paid  in,  surplus  and  profits,  deposits  and 
Federal  notes  in  circidation. 


198  BANKING,  CREDIT  AND  FINANCE 

FEDERAL  RESERVE  BANKS 

Condition  July  4,  1919 

District            Gold  Reserve  Bills  on  Hand  Resources  Note  circul'n 

1.  Boston  ...$105,428,000     $172,407,000  $373,711,000  $182,631,000 

2.  New  York    656,095,000       853,170,000  1,818,155,000  762,915,000 

3.  Philadelp'a   127,492,000       189,316,000  413,537,000  203,310,000 

4.  Cleveland.    202,564,000       154,302,000  440,767,000  217,567,000 

5.  Richmond       66,527,000         94,995,000  231,199,000  109,640,000 

6.  Atlanta    . .     75,690,000         88,948,000  211,656,000  117,320,000 

7.  Chicago   . .   421,900,000       284,413,000  825,849,000  429,248,000 

8.  St.  Louis  .     92,970,000        62,298,000  233,036,000  104,350,000 

9.  Minneapolis    82,822,000         61,217,000  163,774,000  82,203,000 

10.  Kansas  City  81,460,000         84,832,000  240,912,000  94,044,000 

11.  Dallas  . . .     32,334,000           55,050,000  123,706,000  47,908,000 
12.  San  Fr'isco  183,664,000      124,759,000  346,806,000  201,212,000 


Questions  for  Review,  Chapter  IX. 

1.  What  is  the  main  purpose  of  the  Federal  Reserve 
Bank  system? 

2.  How  many  Reserve  Districts  are  there,  and  where 
are  the  Reserve  Banks  located? 

3.  Who  are  the  depositors  in  a  Federal  Reserve  Bank? 
Who  are  the  shareholders  ? 

4.  From  what  sources  does  the  Reserve  Bank  derive 
funds  for  use  in  an  emergency? 

5.  How  are  panics  to  be  prevented  under  the  operation 
of  the  Federal  Reserve  Act? 

6.  How  is  the  Federal  Reserve  Board  constituted,  and 
what  are  its  duties? 

7.  How  many  members  constitute  the  Federal  Advisory 
Council,  and  what  are  its  duties? 

8.  How  are  the  executive  officers  of  a  Reserve  Bank 
appointed,  and  what  are  they  called? 

9.  In  what  way  does  the  new  law  operate  as  a  practical 
guarantee  of  deposits  in  the  member  laanks? 

10.     What  is  the  effect  of  the  Federal  Reserve  System 
on  mercantile  business  and  credit? 


THE  FEDERAL  RESERVE  SYSTEM  199 

11.  What  are  the  chief  characteristics  of  an  ideal  cur- 
rency system  for  the  United  States? 

12.  How  does  the  Federal  Reserve  System  encourage  the 
handling  of  commercial  paper  by  member  banks? 

13.  What  are  the  corporate  powers  of  Federal  Reserve 
banks  ? 

14.  What  are  the  different  classes  of  directors  selected 
for  the  Reserve  banks? 

15.  How  are  the  member  banks  of  a  Federal  Reserve 
district  classified? 

16.  Are  State  banks  encouraged  to  become  members  of 
the  Reserve  system,  and  if  so,  under  what  conditions? 

17.  What  are  the  powers  of  the  Federal  Reserve  Board 
with  regsa^d  to  the  examination  of  banks? 


CHAPTER  X 

Federal  Land  Bank  System 

Section  229.    Primary  Purpose  of  the  System. — 

The  Federal  Farm  Loan  Act,  also  popularly  called 
the  ^* rural  credits  law,"  was  passed  by  both  houses 
of  Congress  in  May,  1916.  It  was  approved  by  Pres- 
ident Wilson  and  became  a  law  July  17,  1916. 

The  primary  purpose  of  this  act  was  to  promote 
agricultural  prosperity  by  enabling  farmers  to  bor- 
row money  on  fami  mortgage  security  at  a  reason- 
able rate  of  interest  and  for  relatively  long  periods 
of  time.  To  attain  this  object,  two  farm  mortgage 
systems  are  provided:  (1)  a  system  operating 
through  regional  land  banks;  (2)  a  system  operating 
through  joint  stock  land  banks. 

To  attract  money  to  the  farm  loan  field,  the  act 
provides  a  method  whereby  those  who  have  money 
to  lend  can  find  safe  investments  in  the  form  of  de- 
bentures or  bonds,  of  small  and  large  denominations, 
issued  by  the  banks  and  based  on  the  security  of 
mortgages  on  farm  lands. 

§  230.  Federal  Farm  Loan  Act.— The  full  title 
of  the  Farm  Loan  Act  states  its  purpose  as  follows : 
"An  Act  to  provide  capital  for  agTicultural  develop- 
ment, to  create  standard  forms  of  investment  based 
upon  farm  mortgage,  to  equalize  rates  of  interest 

200 


FEDERAL  LAND  BANK  SYSTEM  201 

Upon  farm  loans,  to  furnish  a  market  for  United 
States  bonds,  to  create  Government  depositaries  and 
financial  agents  for  the  United  States,  and  for  other 
purposes."  Following  are  some  of  the  provisions  of 
the  Act: 

§  231.  The  Farm  Loan  Board.— That  there  shall 
be  established  at  the  seat  of  govermnent  in  the  De- 
partment of  the  Treasury  a  bureau  charged  with  the 
execution  of  this  act  and  of  all  acts  amendatory 
thereof,  to  be  known  as  the  Federal  Farm  Loan 
Bureau,  under  the  general  supervision  of  a  Federal 
Farm  Loan  Board. 

Said  Federal  Farm  Loan  Board  shall  consist  of 
five  members  including  the  Secretary  of  the  Treas- 
ury, who  shall  be  a  member  and  chairman  ex- 
officio,  and  four  members  to  be  appointed  by  the 
President  of  the  United  States,  by  and  with  the  ad- 
vice and  consent  of  the  Senate.  Of  the  four  members 
to  be  appointed  by  the  President,  not  more  than  two 
shall  be  appointed  from  one  political  party,  and  all 
four  of  said  members  shall  be  citizens  of  the  United 
States  and  shall  devote  their  entire  time  to  the  busi- 
ness of  the  Federal  Farm  Loan  Board ;  they  shall  re- 
ceive an  annual  salary  of  $10,000  payable  monthly, 
together  with  actual  necessary  traveling  expenses. 

§  232.  Federal  Land  Banks.— The  Federal  Farm 
Loan  Board  shall  divide  the  continental  United 
States,  excluding  Alaska,  into  twelve  districts,  which 
shall  be  known  as  Federal  land  bank  districts,  and 
may  be  designated  by  number.  Said  districts  shall 
be  apportioned  with  due  regard  to  the  farm  loan 
needs  of  the  country,  but  no  such  district  shall  con- 
tain a  fractional  part  of  any  State.    The  boundaries 


202  BANKING,  CREDIT  AND  FINANCE 

thereof  may  be  readjusted  from  time  to  time  in  the 
discretion  of  said  board. 

The  Federal  Farm  Loan  Board  shall  establish  in 
each  Federal  land  bank  district  a  Federal  Land 
Bank,  with  its  principal  office  located  in  such  city 
within  the  district  as  said  board  shall  designate. 
Each  Federal  Land  Bank  shall  include  in  its  title  the 
name  of  the  city  in  which  it  is  located.  Subject  to 
the  approval  of  the  Federal  Farm  Loan  Board,  any 
Federal  Land  Bank  may  establish  branches  within 
the  land  bank  district. 

§  233.  Capital  of  Land  Banks. — Every  Federal 
Land  Bank  shall  have,  before  beginning  business,  a 
subscribed  capital  of  not  less  than  $750,000.  The 
Federal  Farm  Loan  Board  is  authorized  to  prescribe 
the  times  and  conditions  of  the  payment  of  subscrip- 
tions to  capital  stock,  to  reject  any  subscription  in  its 
discretion,  and  to  require  subscribers  to  furnish  ade- 
quate security  for  the  payment  thereof. 

The  capital  stock  of  each  Federal  Land  Bank  shall 
be  divided  into  shares  of  $5  each,  and  may  be  sub- 
scribed for  and  held  by  any  individual,  firm,  or  cor- 
poration, or  by  the  Government  of  any  State  or  of 
the  United  States. 

§  234.  Farm  Loan  Associations. — Corporations, 
to  be  known  as  national  farm  loan  associations,  may 
be  organized  by  persons  desiring  to  borrow  money 
on  farm  mortgage  security  under  the  terms  of  this 
Act.  Such  persons  shall  enter  into  articles  of  asso- 
ciation which  shall  specify  in  general  terms  the  ob- 
ject for  which  the  association  is  formed  and  the  ter- 
ritory within  which  its  operations  are  to  be  carried 


I 


FEDERAL  LAND  BANK  SYSTEM  203 

on,  and  which  may  contain  any  other  provision, 
not  inconsistent  with  law,  which  the  association  may 
see  fit  to  adopt  for  the  regulation  of  its  business  and 
the  conduct  of  its  affairs. 

Ten  or  more  natural  persons  who  are  the  owners, 
or  about  to  become  the  owners,  of  farm  land  qualified 
as  security  for  a  mortgage  loan  under  this  Act,  may 
unite  to  form  a  national  farm  loan  association.  They 
shall  organize  subject  to  the  requirements  and  the 
conditions  in  this  Act,  so  far  as  the  same  may  be 
applicable:  Provided,  That  the  board  of  directors 
may  consist  of  five  members  only,  and  instead  of  a 
secretary  and  a  treasurer  there  shall  be  a  secretary- 
treasurer,  who  need  not  be  a  shareholder  of  the  asso- 
ciation. 

§  235.  How  Loans  Are  Made. — When  the 
articles  of  association  are  forwarded  to  the  Federal 
Land  Bank  of  the  district,  they  shall  be  accompanied 
by  the  written  report  of  the  loan  committee,  and  by 
an  affidavit  stating  that  each  of  the  subscribers  is 
the  owner,  or  is  about  to  become  the  owner,  of  farm 
land  qualified  under  this  Act  as  the  basis  of  a  mort- 
gage loan;  that  the  loan  desired  by  each  person  is 
not  more  than  $10,000,  nor  less  than  $100,  and  that 
the  aggregate  of  the  desired  loans  is  less  than  $20,- 
000;  that  said  affidavit  is  accompanied  by  a  subscrip- 
tion to  stock  in  the  Federal  Land  Banli  equal  to  five 
per  centum  of  the  aggregate  sum  desired  on  rriort- 
gage  loans;  and  that  a  temporary  organization  of 
said  association  has  been  formed  by  the  election  of 
a  board  of  directors,  a  loan  committee,  and  a  secre- 
tary-treasurer who  subscribes  to  said  affidavit,  giv- 
ing his  residence  and  post  office  address, 


204  BANKING,  CREDIT  AND  FINANCE 

Upon  receipt  of  its  charter  such  national  fann 
loan  association  shall  be  authorized  and  empowered 
to  receive  from  the  Federal  Land  Bank  of  the  dis- 
trict sums  to  be  loaned  to  its  members  under  the 
terms  and  conditions  of  this  Act.  (Loans  are  only 
made  after  appraisal  of  the  land  offered  as  security, 
by  one  of  the  land  bank  appraisers  provided  for  by 
another  section  of  this  Act). 

§  236.  Powers  of  Farm  Loan  Associations. — 
Every  national  farm  loan  association  shall  have 
power: 

First.  To  indorse,  and  thereby  become  liable  for 
the  payment  of,  mortgages  taken  from  its  share- 
holders by  the  Federal  Land  Bank  of  its  district. 

Second.  To  receive  from  the  Federal  Land  Bank 
of  its  district  funds  advanced  by  said  land  bank,  and 
to  deliver  said  funds  to  its  shareholders  on  receipt 
of  first  mortgages  qualified  under  section  twelve  of 

this  Act. 

Third.  To  acquire  and  dispose  of  such  property, 
real  or  personal,  as  may  be  necessary  or  convenient 
for  the  transaction  of  its  business. 

Fourth.  To  issue  certificates  against  deposits  of 
current  funds  bearing  interest  for  not  longer  than 
one  year  at  not  to  exceed  four  per  centiun  per  annum 
after  six  days  from  date,  convertible  into  faiTn  loan 
bonds  when  presented  at  the  Federal  Land  Bank  of 
the  district  in  the  amount  of  $25  or  any  multiple 
thereof.  Such  deposits,  when  received,  shall  be 
forthwith  transmitted  to  said  bank,  and  be  invested 
by  it  in  the  purchase  of  farm  loan  bonds  issued  by  a 


FEDERAL  LAND  BANK  SYSTEM  205 

Federal  Land  Bank  or  in  first  mortgages  as  defined 
by  this  Act. 

§  237.  Restrictions  on  Loans. — No  Federal  Land 
Bank  organized  under  this  Act  shall  make  loans 
except  upon  the  following  teniis  and  conditions: 

First.  Said  loans  shall  be  secured  by  duly  re- 
corded first  mortgages  on  farm  land  within  the  land 
bank  district  in  which  the  bank  is  situated. 

Second.  Every  such  mortgage  shall  contain  an 
agreement  providing  for  the  repayment  of  the  loan 
on  an  amortization  plan  by  means  of  a  fixed  munber 
of  annual  or  semiannual  installments  sufficient  to 
cover,  first,  a  charge  on  the  loan,  at  a  rate  not  ex- 
ceeding the  interest  rate  in  the  last  series  of  farm 
loan  bonds  issued  by  the  land  bank  making  the  loan; 
second,  a  charge  for  administration  and  profits  at  a 
rate  not  exceeding  one  per  centmn  per  annum  on 
the  unpaid  principal,  said  two  rates  combined  con- 
stituting the  interest  rate  on  the  mortgage;  and, 
third,  such  amounts  to  be  applied  on  the  principal 
as  will  extinguish  the  debt  within  an  agreed  period, 
not  less  than  five  years  nor  more  than  forty  years: 
Provided,  That  after  five  years  from  the  date  upon 
which  a  loan  is  made  additional  payments  in  sums 
of  $25  or  any  multiple  thereof  for  the  reduction  of 
the  principal,  or  the  payment  of  the  entire  principal, 
may  be  made  on  any  regular  installment  date  under 
the  rules  and  regulations  of  the  Federal  Farm  Loan 
Board:  And  provided  further,  That  before  the  first 
issue  of  farm  loan  bonds  by  any  land  bank  the  interest 
rate  on  mortgages  may  be  determined  in  the  discre- 
tion of  said  land  bank  subject  to  the  provisions  and 
limitations  of  this  Act. 


206  BANKING,  CREDIT  AND  FINANCE 

Third.  No  loan  on  mortgage  shall  be  made  imder 
this  Act  at  a  rate  of  interest  exceeding  six  per  centum 
per  annum,  exclusive  of  amortization  payments. 

Fourth.  Such  loans  may  be  made  for  the  following 
purposes  and  for  no  other: 

(a)  To  provide  for  the  purchase  of  land  for  agri- 
cultural uses. 

(b)  To  provide  for  the  purchase  of  equipment, 
fertilizers  and  live  stock  necessary  for  the  proper 
and  reasonable  operation  of  the  mortgaged  farm;  the 
term  *' equipment"  to  be  defined  by  the  Federal  Farm 
Loan  Board. 

(c)  To  provide  buildings  and  for  the  improvement 
of  farm  lands;  the  term  *' improvement''  to  be  de- 
fined by  the  Federal  Farm  Loan  Board. 

(d)  To  liquidate  indebtedness  of  the  owner  of  the 
land  mortgaged,  existing  at  the  time  of  the  organiza- 
tion of  the  first  national  farm  loan  association  estab- 
lished in  or  for  the  county  in  which  the  land  mort- 
gaged is  situated,  or  indebtedness  subsequently  in- 
curred for  purposes  mentioned  in  this  section. 

Fifth.  No  such  loan  shall  exceed  fifty  per  centum 
of  the  value  of  the  land  mortgaged  and  twenty  per 
centum  of  the  value  of  the  permanent,  insured  im- 
provements thereon,  said  value  to  be  ascertained  by 
appraisal,  as  provided  in  this  Act.  In  making  said 
appraisal  the  value  of  the  land  for  agricultural  pur- 
poses shall  be  the  basis  of  appraisal  and  the  earning 
power  of  said  land  shall  be  a  principal  factor. 

A  reappraisal  may  be  permitted  at  any  time  in  the 
discretion  of  the  Federal  Land  Bank,  and  such  ad- 
ditional loan  may  be  granted  as  such  reappraisal 


FEDERAL  LAND  BANK  SYSTEM  207 

will  warrant  under  the  provisions  of  this  paragraph. 
Whenever  the  amount  of  the  loan  applied  for  exceeds 
the  amount  that  may  be  loaned  under  the  appraisal 
as  herein  limited,  such  loan  may  be  granted  to  the 
amount  permitted  under  the  terms  of  this  paragraph 
without  requiring  a  new  application  or  appraisal. 

Sixth.  No  such  loan  shall  be  made  to  any  person 
who  is  not  at  the  time,  or  shortly  to  become,  engaged 
in  the  cultivation  of  the  farm  mortgaged.  In  case 
of  the  sale  of  the  mortgaged  land,  the  Federal  Land 
Bank  may  permit  said  mortgage  and  the  stock  in- 
terests of  the  vendor  to  be  assumed  by  the  purchaser. 
In  case  of  the  death  of  the  mortgagor,  his  heir  or 
heirs,  or  his  legal  representative  or  representatives, 
shall  have  the  option,  within  sixty  days  of  such  death, 
to  assmne  the  mortgage  and  stock  interests  of  the  de- 
ceased. 

Seventh.  The  amount  of  loans  to  any  one  borrower 
shall  in  no  case  exceed  a  maximum  of  $10,000,  nor 
shall  any  loan  be  for  a  less  sum  than  $100. 

§  238.  Agents  of  Federal  Land  Banks.— When- 
ever, after  this  Act  shall  have  been  in  effect  one 
year,  it  shall  appear  to  the  Federal  Farm  Loan  Board 
that  national  farm  loan  associations  have  not  been 
formed,  and  are  not  likely  to  be  formed,  in  any  local- 
ity, because  of  peculiar  local  conditions,  said  board 
may,  in  its  discretion,  authorize  Federal  Land  Banks 
to  make  loans  on  farm  lands  through  agents  approved 
by  said  board. 

Such  loans  shall  be  subject  to  the  same  conditions 
and  restrictions  as  if  the  same  were  made  through 
national  farm  loan  associations,  and  each  borroweJ^ 


208  BANKING,  CREDIT  AND  FINANCE 

shall  contribute  five  per  centum  of  the  amount  of 
his  loan  to  the  capital  of  the  Federal  Land  Bank,  and 
shall  become  the  owner  of  as  much  capital  stock 
of  the  land  bank  as  such  contribution  shall  warrant. 

No  agent  other  than  a  duly  incorporated  bank, 
trust  company,  mortgage  company,  or  savings  insti- 
tution, chartered  by  the  State  in  which  it  has  its 
principal  office,  shall  be  employed  luider  the  pro- 
visions of  this  section. 

§  239.  Joint  Stock  Land  Banks. — In  addition  to 
the  system  of  twelve  Federal  Land  Banks  and  the 
national  farm  loan  associations  of  borrowers,  the  act 
permits  the  establishment  of  joint  stock  land  banks 
and  authorizes  them  to  carry  on  the  business  of 
lending  directly  to  borrowers  on  farm  mortgage 
security  and  issuing  farm  loan  bonds.  These  banks 
must  have  a  capital  of  not  less  than  $250,000.  They 
are  under  the  supervision  of  the  federal  farm  loan 
board,  but  the  government  does  not  lend  them  any 
financial  assistance. 

The  joint  stock  land  bank  is  free  from  many  of  the 
conditions  imposed  on  the  Federal  Land  Banlcs. 
Subject  to  the  50  and  20  per  cent  value  limitation  and 
the  limitation  as  to  territory,  the  joint  stock  land 
bank  may  lend  more  than  $10,000  to  a  single  individ- 
ual and  it  is  not  restricted  to  making  loans  for  the 
purposes  specified  in  the  case  of  the  Federal  Land 
Bank. 

The  joint  stock  bank,  like  the  Federal  Land  Banks, 
cannot  charge  an  interest  rate  on  farm  mortgages 
in  excess  of  6  per  cent,  nor  shall  such  interest  rate 
exceed  by  more  than  1  per  cent  the  rate  of  interest 


FEDERAL  LAND  BANK  SYSTEM  209 

paid  by  the  bank  upon  its  last  issue  of  bonds.  A 
joint  stock  bank  is  limited  in  its  bond  issue  to  fifteen 
times  its  capital  and  surplus. 

Among  the  restrictions  placed  on  these  banks 
under  the  act  are  (1)  that  their  mortgages  must  pro- 
vide for  an  amortization  system  of  repayment  such 
as  is  prescribed  in  the  case  of  loans  through  the  Fed- 
eral Land  Banks,  and  (2)  that  they  shall  in  no  case 
demand  or  receive  under  any  form  or  pretense  any 
commission  or  charge  not  specifically  authorized  by 
the  act  and  approved  by  the  farm  loan  board. 

The  bonds  of  the  joint  stock  land  banks  are  ex- 
empted from  taxation.  Their  capital  stock,  how- 
ever, is  not  exempted. 

§  240.  General  Provisions. — The  law,  through 
the  Farm  Loan  Board,  provides  the  necessary  ma- 
chinery for  fi'equent  examinations  of  the  banks  and 
the  associations,  for  the  proper  cancellation  of  mort- 
gages and  for  the  safe  custody  of  mortgages  offered 
as  security  for  bonds.  When  any  mortgage  of- 
fered as  security  for  bonds  is  withdrawn  the  bank  is 
required  to  replace  the  security  with  other  mort- 
gages or  with  other  satisfactory  collateral. 

Heavy  penalties  of  fine  or  imprisomnent,  or  both, 
are  imposed  for  violations  of  the  act,  malfeasance  in 
office,  fraud,  embezzlement,  defalcation,  or  other 
illegal  practices. 


§  241.  What  is  Amortization?— The  Federal 
Farm  Loan  Act  is  a  law  the  intention  of  which  is  to 
make  it  possible  for  the  fanxiers  to  make  money  by 
borrowing  money.    Its  intention  is  to  place  money 


210  BANKING,  CREDIT  AND  FINANCE 

within  reach  of  the  farmer  on  such  terms  as  to  con- 
vert the  farm  mortgage  into  a  source  of  profit. 

The  law  requires  that  the  Federal  Farm  Loan 
Board  *' shall  prepare  and  publish  amortization 
tables  which  shall  be  used  by  national  farm  loan 
associations  and  land  banks  organized  under  this 
act."  In  many  other  parts  of  the  law  this  word 
** amortization"  is  used. 

Now,  what  is  amortization,  and  what  is  there  in 
it  for  the  farmer?  The  word  "amortization"  is  a 
cousin  of  a  number  of  other  words  in  the  English 
language.  When  a  wound  or  a  disease  brings  death 
we  call  it  ''mortal."  Human  beings  are  said  to  be 
*' children  of  mortality,"  because  all  men  must  die. 
Insurance  companies  use  what  are  called  ''mortal- 
ity" tables,  which  show  the  percentages  of  certain 
classes  of  people  to  die  within  certain  periods  of 
time.  All  these  words  are  derived  from  the  Latin 
word  "mors,"  which  means  "death."  To  "amortize" 
a  mortgage,  therefore,  is  to  put  it  to  death.  The 
"amortization"  of  a  mortgage  means,  literally,  kill- 
ing off  the  mortgage.  Almost  every  farmer,  there- 
fore, must  be  interested  in  any  system  based  upon 
the  principle,  first,  of  making  it  possible  for  farmers 
to  get  into  debt  on  an  economical  and  even  a  prof- 
itable basis,  and  at  the  same  time  of  killing  the  mort- 
gage off,  or  getting  out  of  debt  by  amortization. 

§  242.  An  Easy  Plan  for  Farmers. — Only  one 
kind  of  a  mortgage  loan  is  permitted  under  the  Fed- 
eral Farm  Loan  Act,  and  that  is  one  which  is  killed 
off,  put  to  death,  or  amortized  during  the  time  for 
which  the  loan  is  made.  This  would  make  it  very 
hard  for  the  farmer  if  he  were  obliged  to  pay  his 


FEDERAL  LAND  BANK  SYSTEM  211 

debt  in  three  or  five  years,  which  are  the  terms  under 
which  most  farm  loans  have  been  made  in  the  past. 
It  is  easy  to  see  that  a  farmer,  who  borrows  a  thou- 
sand dollars  on  five  years'  time  must  pay  nearly  two 
hundred  dollars  a  year  on  the  principal  besides  tak- 
ing care  of  the  interest,  if  he  pays  it  off  during  the 
time  for  which  the  money  is  borrowed.  In  the  vast 
majority  of  cases  it  is  about  all  he  can  do  to  pay  the 
interest  and  a  very  small  amount,  perhaps,  on  the 
principal.  The  result  has  been  that  he  has  been 
obliged  to  renew  the  loan  at  the  end  of  the  three  years' 
or  five  years'  time.  In  many  instances  the  renewal 
of  the  loan  has  been  difficult,  and  he  has  been  worried 
and  troubled  by  the  necessity  of  getting  the  loan 
renewed;  he  has  frequently  had  to  pay  commissions 
and  agents'  fees  for  the  renewal,  and  in  most  in- 
stances has  been  obliged  to  have  his  title  examined 
again,  and  has,  in  fact,  been  put  to  a  good  deal  of 
expense  and  trouble.  When  these  renewals  have 
had  to  be  made  in  times  of  financial  stringency,  the 
farmer  has  sometimes  lost  his  farm  because  he  could 
not  get  his  loan  renewed. 

All  these  conditions  are  changed  for  farmers  who 
take  out  loans  under  the  Federal  Farm  Loan  Act. 
He  may  take  out  the  loan  under  this  act  for  as  short 
a  time  as  five  years,  but  so  far  no  farmer  in  the 
United  States  has  boiTowed  under  the  Federal  Farm 
Loan  Act  for  as  short  a  time  as  five  years.  He  does 
not  need  to.  No  matter  how  long  a  time  he  may  select 
for  the  running  of  his  loan,  he  has  the  right  to  pay 
off,  after  five  years,  on  any  interest  date,  in  sums  as 
low  as  $25.  So  that,  even  though  he  may  borrow  for 
40  years,  his  loan  is  absolutely  under  his  control,  so 
far  as  payment  is  concerned,  after  the  lapse  of  five 


212  BANKING,  CREDIT  AND  FINANCE 

years.  If  he  has  the  money  idle  and  can  not  find  any 
better  use  for  it  he  may  pay  off  his  mortgage  and 
clean  the  whole  thing  up.  If  he  is  not  able  to  save 
the  money,  or  if  he  can  find  some  better  use  for  the 
money,  he  does  not  need  to  pay  up  except  as  required 
to  amortize  or  kill  off  the  mortgage. 

This  gives  to  farmers  borrowing  under  the  Federal 
Farm  Loan  Act  the  easiest  farm-mortgage  plan  ever 
known  to  the  American  fanner. 

§  243.  Example. — Suppose  you  are  a  farmer  and 
wish  to  borrow  $3,000  on  the  security  of  your  land. 
You  borrow  it  by  joining  a  national  fann  loan  associa- 
tion in  the  manner  described  in  the  act.  You  get 
your  $3,000  in  cash.  In  order  to  get  it  you  have  to 
furnish  evidence  of  your  title,  and  your  land  must 
be  appraised.  You  take  it  on  35  years'  time.  This 
does  not  mean  that  the  loan  runs  for  35  years  and 
then  fall  due.  These  amortized  loans  "mature"  in 
35  years,  but  they  never  fall  due.  They  are  amortized 
or  killed  off  by  small  payments  every  year.  The 
payments  may  be  either  every  six  months  or  every 
year,  and  the  first  payment  is  exactly  the  same  as 
the  payment  made  at  the  end  of  the  thirty-fourth 
year.  The  last  payment  may  not  be  exactly  the  same 
size  as  the  other  payments,  but  it  is  about  the  same. 

In  your  case  you  would  pay  5%  per  cent  interest 
on  your  $3,000,  which  is  $165  a  year.  This  is  the 
regular  interest.  You  would  amortize  the  loan  or 
kill  it  off  by  paying  another  1  per  cent  of  $3,000,  or 
$30  to  the  $165  interest,  making  $195.  By  paying 
this  sum,  $195,  annually  for  35  years  you  not  only 
will  carry  interest  on  the  debt,  but  you  will  complete- 
ly pay  it  off,  amortize  it,  extinguish  it. 


J 


FEDERAL  LAND  BANK  SYSTEM  213 

§  244.    What  Amortization  Does  For  Farmers. — 

In  the  past  the  lender  has  had  control  of  the  matter 
of  payment.  The  borrower  has  been,  in  the  scrip- 
tural sense,  ''the  servant  to  the  lender."  Amortiza- 
tion changes  all  that.  The  borrower,  for  the  first 
time,  is  given  the  chance  to  say  what  he  wants. 
When  he  boiTows  through  a  Federal  Land  Bank,  the 
land  bank  will  not  tell  him  he  can  have  the  money 
for  only  one  year,  or  three  years,  or  five  years,  but 
the  farmer  will  tell  the  bank  how  long  he  wishes  the 
mortgage  to  run.  He  can  pay  the  mortgage  off 
only  after  the  lapse  of  five  years,  but  the  history  of 
farm  mortgages  shows  that  when  a  farm  is  once 
mortgaged  it  usually  stays  mortgaged.  For  the  bene- 
fit of  the  farmer,  therefore,  it  is  much  better  to  have 
the  debt  under  the  control  of  the  boiTower  than 
under  the  control  of  the  lender.  Amortization  works 
Avonders  for  the  farmer  who  is  in  debt.  It  relieves 
his  mind,  for  the  fear  of  foreclosure  no  longer  haunts 
hun.  It  lightens  the  drain  on  his  purse,  for  it  re- 
duces the  interest  he  has  to  pay.  Most  of  the  farm 
loans  in  the  United  States,  up  to  1919,  were  drawing 
interest  at  about  8  per  cent,  some  of  them  as  high 
as  12  per  cent  and  15  per  cent  and  only  a  few  of  them 
in  number  were  made  at  a  rate  as  low  as  5%  per  cent 
net.  The  Federal  farm  loan  rate  all  over  the  United 
States  is  5Vi>  per  cent  flat,  and  everything  the  farmer 
pays  above  that  is  an  amortization  charge,  and  cuts 
down  or  kills  off  the  mortgage. 

§  245.  Making  Additional  Payments. — The  Fed- 
eral Farm  Loan  Act  gives  the  farmer  the  privilege  of 
paying  any  amount  he  wishes,  from  $25  up,  to  be 
applied  on  the  principal  of  his  loan  after  the  lapse  of 


214  BANKING,  CREDIT  AND  FINANCE 

five  years,  on  the  date  of  any  payment  called  for  by 
his  contract.  Where  such  payments  are  made  it 
changes  all  the  subsequent  payments  on  the  loan, 
and  the  amortization  table  for  that  loan  is  no  longer 
a  guide  as  to  the  condition  of  the  loan.  To  figure 
out  exactly  the  amount  due  on  a  loan  which  has  run 
15  or  20  years,  and  been  decreased  by  one  or  more 
extra  payments  of  this  sort,  is  easy  for  those  who 
are  familiar  with  the  system,  but  would  be  a  rather 
complicated  problem  for  the  average  man. 

§  246.  Benefits  of  Amortization. — Any  farmer 
however,  can  see  at  once  that  an  amortized  loan  is 
very  much  better  for  him  than  the  old-fashioned 
mortgage.  Under  an  amortized  loan  he  pays  off 
gradually  because  he  is  obliged  to  do  so,  and  the  whole 
loan  never  falls  due.  He  is  never  obliged  to  go 
through  the  worry,  trouble,  and  expense  of  renewing 
the  whole  of  a  mortgage  and  perhaps  being  asked 
by  the  lender  to  reduce  it  by  paying  a  sum  larger 
than  he  can  raise.  The  principal  benefit,  however, 
seems  to  lie  in  the  saving  of  interest.  If  a  straight 
mortgage  loan  of  $1,000  was  carried  35  years  at  5I/2 
per  cent  the  borrower  would  pay  $1,925  in  interest. 
That  is,  he  would  make  35  interest  payments  of 
$55  each  and  he  would  still  owe  his  whole  debt  of 
$1,000.  But  the  interest  tables  furnished  to  the  bor- 
rower show  that  if  he  carries  his  amortized  loan  of 
$1,000  at  5I/2  pe^  cent  through  for  the  35  years  with- 
out any  extra  payments,  the  interest  is  only  $1,272.50. 
It  is  only  the  first  interest  payment  on  this  loan  which 
is  exactly  a  $55  pajanent.  All  interest  payments 
after  the  first  are  less  than  $55  each.  The  second 
year  the  interest  payment  is  $54.45.    The  third  year 


FEDERAL  LAND  BANK  SYSTEM  215 

it  is  $53.87,  and  at  the  thirty-fifth  year  the  interest 
payment  is  only  $3.26.  All  this  time  the  payments 
on  the  principal  are  increasing,  year  by  year,  as 
the  interest  payments  grow  smaller.  The  average 
interest  payment  on  this  loan  is  $36.36  a  year,  or  an 
average  interest  rate  of  about  3  2/3  per  cent  a  year. 
To  be  sure,  he  pays  5i/^  per  cent  interest  on  every 
cent  which  he  owes  during  the  entire  life  of  the  loan, 
but  the  amount  which  he  owes  is  made  less  and  less 
every  year  by  the  application  of  a  part  of  his  pay- 
ments to  the  discharge  of  the  principal. 

§  247.  Loans  by  Land  Banks.— On  October  31, 1919, 
the  twelve  Federal  Land  Banks  had  assets  amount- 
ing to  $315, 442,000.  Their  mortgage  loans  amounted 
to  $271,317,816.  The  total  paid-in  capital  was 
$21,894,256.50,  of  which  $8,256,809  was  owned  by  the 
government,  $13,536,782.50  by  national  farm  loan 
associations,  $47,235  by  individual  subscribers  and 
$44,430  by  borrowers  through  agents.  There  were 
3,989  farm  loan  associations  on  the  date  named. 
The  number  and  amount  of  loans  approved  in  each 
federal  land  bank  district  were: 

District  Number  Aaiount 

1.  Springfield,  Mass 3,771  $10,433,445 

2.  Baltimore,   Md 4,288  10,928,300 

3.  Columbia,  S.  C 6,804  14,442,495 

4.  Louisville,  Ky 6,505  18,900,100 

5.  New  Orleans,  La 12,769  18,667,930 

€.     St.  Louis,  Mo 9,374  21,596,280 

7.  St  Paul,  Minn 13,206  35,383,000 

8.  Omaha,  Neb 7,171  36,131,690 

9.  Wichita,    Kans 10,111  23,961,900 

10.  Houston,  Tex 10,643  29,999,156 

11.  Berkeley,   Cal 4,686  14,578,900 

12.  Spokane,  Wash 14,344  36,294,620 

Total    163,672  271,317,816 

The  net  earnings  of  these  banks  to  October  31, 1919, 


216  BANKING,  CREDIT  AND  FINANCE 

were  $1,278,000,  from  which  in  addition  to  a  reserve 
of  $202,175,  dividends  were  paid  to  the  amount  of 
$332,923,  leaving  the  net  undivided  profits  on  hand 
$743,295. 

§  248.  Joint  Stock  Land  Banks.— Twenty-five 
joint  stock  land  banks  had  been  organized  and  were 
doing  business  October  31,  1919.  The  aggregate  as- 
sets of  the  twenty-five  banks  on  that  date  amounted 
to  $62,917,000,  the  principal  items  being  mortgaged 
loans,  amounting  to  $48,092,000,  United  States  bonds 
and  other  securities  $8,486,000,  cash  on  hand  and  in 
banks  $3,415,000.  The  capital  of  these  joint  banks 
was  $7,812,050,  surplus  $151,415,  reserve  $35,231. 


Questions  for  Review,  Chapter  X. 

1.  "ViTiat  is  the  primary  purpose  of  the  Federal  Land 
Bank  system? 

2.  How  is  the  Farm  Loan  Act  administered?    By  what 
body,  and  how  is  it  constituted? 

3.  How  is  the  country  divided  for  the  purposes  of  the 
Act? 

4.  What  is  the  capital  of  the  Farm  Loan  banks,  and  how 
is  it  derived? 

5.  How  are  Farm  Loan  Associations  organized,  and  by 
whom? 

6.  What  are  the  powers  of  Farm  Loan  Associations? 

7.  How  and  to  whom  may  loans  be  made  by  Farm  Loan 
banks  ? 

8.  How  are  farm  loans  secured  under  the  Act?     What 
restrictions  are  provided? 

9.  What  is  the  nature  of  the  Joint  Stock  Loan  banks 
provided  for  in  the  Act? 

10.  What  is  the  meaning  of  "amortization"? 

11.  In  what  way  does  this  system  benefit  the  farmer  who 
carries  a  loan? 

12.  Give  an  example  of  the  working  of  the  amortization 
plan. 


CHAPTER  XI 

The  Comptroller's  Office 

Section  249.  Supervision  of  Banks. — The  office  of 
the  Comptroller  of  the  Currency,  heretofore  referred 
to,  was  created  by  an  act  of  Congress  passed  in  1863. 
The  duties  defined  by  the  statute  were  that  he  should 
have  the  supervision  of  banks  to  be  organized 
throughout  the  country,  known  as  "national  banks.'* 
These  banks  were  compelled  to  deposit  with  the 
Treasury  department  United  States  bonds  to  be 
held  as  security  for  their  circulating  notes,  thus 
providing  a  sound  bank  currency  and  at  the  same 
time  creating  a  market  for  bonds. 

It  was  the  intention  of  those  who  created  the  act 
that  the  office  should  be  kept  out  of  politics.  It  was 
created  for  a  distinct  business  purpose,  having  a 
close  relation  to  the  commercial  and  financial  in- 
terest of  the  country,  and  the  situation  required  that 
the  Comptroller  should  be  free  from  all  political  bias, 
and  that  the  office  should  remain  outside  the 
realm  of  politics.  So  far  as  the  Comptrollers  of  the 
Currency  have  been  concerned,  they  have,  as  best 
they  could  within  their  power,  kept  the  office  out  of 
politics  and  made  it  distinctly  a  business  office. 

In  accordance  with  this  idea,  the  incumbent  of  the 
office  was  tp  be  appointed  by  the  President  of  the 

217 


218  BANKING,  CREDIT  AND  FINANCE 

United  States  upon  the  suggestion  of  the  Secretary 
of  the  Treasury,  and  to  hold  the  office  for  a  period 
of  five  years,  thus  extending  it  beyond  the  incum- 
bency of  the  presidential  office.  The  Comptroller 
could  not  be  removed  from  office  except  on  charges 
filed  by  the  President,  and  action  taken  thereon  in 
the  form  of  impeachment — the  only  office,  with  pos- 
sibly the  exception  of  the  Director  of  the  Mint,  where 
removal  cannot  be  had  on  charges  filed  with  the 
Senate. 

§  250.  An  Independent  Office. — There  is  a  nom- 
inal affiliation  between  the  Treasury  department  and 
the  office  of  the  Comptroller  of  the  Currency,  but 
the  Comptroller's  office,  differing  from  any  other 
connected  with  the  department,  does  not  report  on 
what  goes  on  within  the  Comptroller's  office,  either 
to  the  Treasurer  or  to  the  President;  nor  does  the 
Comptroller  report  either  to  the  President  or  the 
Secretary,  but  he  reports  directly  to  the  Congress 
of  the  United  States,  being  required  to  give  annually 
the  conditions  of  the  banks  as  they  are  on  a  certain 
day  prior  to  the  convening  of  Congress,  together  with 
such  recommendations  as  would,  in  his  opinion,  im- 
prove the  banking  conditions  of  the  country.  The 
salary  of  the  office,  like  that  attaching  to  most  high 
positions  under  the  government,  is  very  meager, 
being  only  $5,000  a  year;  and  yet  there  are  a  good 
many  people  willing  to  accept  the  place. 

The  act  creating  the  national  bank  system  and  the 
office  of  Comptroller  sets  forth  what  shall  be  done 
to  create  a  national  bank.  It  gives  the  number  of 
persons  who  may  take  a  charter  (not  less  than  five), 
and  fixes  the  minimum  amount  of  capital  for  such 


THE  COMPTROLLER'S  OFFICE  219 

banks,  that  being  not  less  than  $50,000  in  cities  of 
not  over  6,000  inhabitants,  and  from  $100,000  to 
$2,000,000  in  cities  of  larger  size.  This  act  has  been 
amended  to  permit  the  organization  of  banks  with 
$25,000  capital,  and  in  other  respects. 

§  251.  Organization  Department. — The  office  in 
its  organization  has  three  or  four  departments.  The 
Organization  Department  receives  the  applica- 
tion for  the  creation  of  a  national  bank.  The  ap- 
plication must  set  forth  the  names  of  those  who  are 
seeking  the  charter,  the  amount  of  capital,  the 
population  of  the  city,  etc.  When  the  application 
is  received,  the  Comptroller  examines  it  to  ascertain 
whether  or  not  the  persons  applying  should  be  grant- 
ed a  charter;  and  if,  in  his  judgment,  a  charter 
should  not  be  given,  it  is  not  granted.  This  is  not  the 
result  of  any  statutory  requirement  but  a  course 
which  the  office  has  assumed  of  itself  without  any 
question  as  to  its  right.  The  great  powers  of  which 
the  incumbent  of  the  office  is  possessed  are  powers 
which  he  has  assumed  rather  than  received  by  legis- 
lative enactment,  and  their  assumption  and  continued 
possession  come  largely  from  the  fact  that  the  bank- 
ing institutions  over  which  he  presides  realize  the 
importance  of  the  Comptroller's  hands  being  upheld, 
if  the  banks  are  to  be  healthful  and  sound  institu- 
tions. 

The  bank,  having  been  granted  a  charter,  is  given 
a  name,  that  which  the  incorporators  select  always 
being  given,  unless  at  that  time  or  prior  the  name 
suggested  has  been  used  by  another  bank.  The  banl^, 
having  then  deposited  with  the  Treasurer  of  the 
United  States  the  minimum  amount  of  bonds,  may 


220  BANKING,  CREDIT  AND  FINANCE 

now  take  out  circulation.  There  have  been  a  good 
many  banks,  especially  in  the  larger  cities  requiring 
a  minimum  amount  of  $50,000  bonds,  which  have 
never  taken  out  any  circulation  whatever.  There 
are  few  banks  that  have  the  maximum  amount  of 
fdrculation  which  the  law  permits  them.  This  is  on 
the  principle  that  there  is  not  any  profit  in  the  cir- 
culation, and  that  it  is  better  to  leave  the  bonds  with- 
out taking  out  the  circulation,  paying  the  tax,  and 
going  to  the  general  trouble  of  having  the  circula- 
tion issued. 

§  252.  National  Bank  Examiners. — ^After  the 
bank  has  been  established,  it  comes  under  the  active 
supervision  of  the  Comptroller  of  the  Currency. 
Under  the  act  he  is  empowered,  subject  to  the  ap- 
proval of  the  Secretary  of  the  Treasury  (and  in  that 
alone  has  the  Secretary  any  control  over  the  Comp- 
troller's office,  exercising  the  same  right  that  the 
Senate  of  the  United  States  does  over  the  appoint- 
ments of  the  President  of  the  United  States),  to  ap- 
point a  number  of  men  to  the  olf  ice  of  National  Bank 
Examiners.  Their  duties,  under  the  direction  of  the 
Comptroller  of  the  Currency,  are  to  visit  the  banks 
in  the  districts  to  which  they  are  appointed. 

Here  again  comes  into  play  the  power  assumed  on 
the  part  of  the  Comptroller,  for  he  makes  it  the 
duty  of  the  examiner,  not  only  to  see  that  the  cap- 
ital stock  is  intact  but  to  see  further  that  all  the 
methods  of  banking  employed  in  the  bank  are  of  a 
character  that  insures  not  only  safety  to  the  public, 
but  benefit  to  the  stockholder.  As  a  result,  the 
examiner  not  only  sees  that  all  the  cash  is  there,  but 
he  takes  upon  himself  the  duty  of  seeing  to  it,  as  far 


THE  COMPTROLLER'S  OFFICE  2551 

as  he  can,  that  the  paper  held  by  the  bank  \h  genuine, 
that  the  notes  are  of  the  value  that  they  represent 
themselves  to  be,  and  that  many  other  details  are 
properly  administered. 

Thus  it  happens  that  when  an  inspector  comes 
into  a  bank  and  finds  an  old-fashioned  method  of 
bookkeeping  employed,  he  reports  that  fact;  he  also 
ascertains  the  salary  of  the  various  officials,  the 
amount  of  rent  paid,  and  all  other  details  which  enter 
into  the  conduct  of  a  bank.  The  same  method  of 
examination  is  pursued  whether  in  the  National  City 
Bank  of  New  York,  with  a  capital  of  $25,000,000,  or 
in  the  smallest  bank  of  medium  capital. 

The  great  strength  of  the  national  bank  system, 
the  great  source  of  its  influence  over  the  banking 
system  of  the  country  since  its  establishment,  has 
arisen  from  the  very  uniformity  of  the  control  ex- 
ercised in  the  Comptroller's  office,  bringing  about 
in  the  individual  banks,  whether  in  Chicago,  New 
York  or  elsewhere,  the  same  method  of  bookkeeping 
and  the  same  details  which  are  necessary  to  the 
careful  management  of  a  bank. 

§  253.  Department  of  Reports. — The  examiner's 
report  is  made  to  the  Comptroller  of  the  Currency, 
and  thence  sent  to  the  Department  of  Eeports,  where 
there  is  a  large  force  of  clerks  to  examine  these  re- 
ports, see  what  is  defective  in  the  bank,  and  compare 
with  the  previous  report.  Upon  the  basis  of  these 
reports  the  Comptroller  of  the  Currency  writes  to 
the  president  or  directors  of  the  bank  suggesting 
steps  to  be  taken  to  strengthen  the  position  of  the 
bank. 


222  BANKING,  CREDIT  AND  FINANCE 

§  254.  Redemption  Department. — There  is  an- 
other division  of  the  Comptroller's  office  known  as 
the  Redemption  Department,  where  mutilated  and 
worn-out  bank  notes  and  the  notes  of  banks  which 
have  gone  into  liquidation  are  redeemed. 

§  255.  Issuing  Department. — Another  depart- 
ment, known  as  the  Issuing  Department,  issues  to 
the  banks  the  amount  of  bank  notes  to  which  they 
are  entitled.  Until  the  Bank  Act  was  amended  dur- 
ing the  administration  of  President  McKinley,  the 
amounts  of  circulating  notes  to  be  issued  on  the  de- 
posit of  bonds  was  90  per  cent  of  the  par  value  of  the 
bonds.  But  under  the  present  act,  the  total  value  of 
the  bonds  may  be  issued  upon  the  2  per  cent  bonds 
which  were  the  refunding  bonds  of  the  former  ad- 
ministration. 

As  to  whether  a  bond-secured  circulation  is  a  wise 
circulation  there  are  a  good  many  suggestions.  Safe- 
ty does  not  enter  into  the  question  so  long  as  the 
bonds  of  the  United  States  continue  good;  which 
will  be  as  long  as  United  States  revenues  are  col- 
lected; as  long  as  the  people  are  able  to  pay  internal- 
revenue  taxes  or  duties  on  imported  goods.  It  has 
been  suggested  that  the  method  of  issuing  bank- 
note currency  is  not  desirable,  because  it  gives  to 
the  creditor  of  the  bank  who  is  a  note-holder  an  ad- 
vantage over  the  creditor  who  is  simply  a  depositor, 
in  making  the  former  preferred  over  the  latter. 
Under  the  existing  bond  system  the  note-holder  is 
a  preferred  creditor,  because  before  the  bank  gets 
started  into  active  operation  so  many  of  its  assets 
are  taken  in  the  shape  of  bonds  and  deposited  with 
the  Treasurer  of  the  United  States  to  secure  bank 


THE  COMPTROLLER'S  OFFICE  223 

notes,  these  bonds  being  sold  in  case  of  failure  of  the 
bank,  and  the  amount  received  from  the  sale  being 
used  to  pay  the  claim  of  the  preferred  creditor,  who 
holds  the  notes  of  the  bank.  In  case  there  is  not  a 
sufficient  amount  of  money  received  from  the  bonds 
to  pay  the  notes,  the  act  provides  that  the  note- 
holder shall  have  a  prior  lien  on  the  other  assets  of 
the  bank,  out  of  which  he  shall  be  reimbursed  before 
the  payment  is  made  to  depositors. 

Another  objection  which  has  always  been  found 
has  not  arisen  from  the  idea  that  the  safety  could  be 
improved,  but  is  that  with  a  note  circulation  amount- 
ing to  only  90  per  cent,  or  even  to  par  on  the  deposited 
bonds,  the  premium  on  the  bonds  over  their  par  value 
is  always  tied  up.  When  the  banks  were  allowed 
circulation  equal  to  90  per  cent  of  the  par  value  of 
the  bonds  and  the  bond  was  selling  at  100  to  115, 
there  was  always  twenty-five  dollars  locked  up,  not 
available  for  loaning;  and  even  at  present  there  is 
still  eleven  dollars  taken  out  of  the  actual  channels 
of  the  business  and  permitted  to  lie  in  Washington,  a 
source  of  profit  neither  to  the  bank  nor  to  Congress. 

So  there  are  some  very  valid  objections  to  the  pro- 
visions for  issuing  notes  by  the  banks,  and  a  former 
Comptroller  said  on  this  point,  "As  we  make  pro- 
gress in  the  field  of  finance  we  shall  come  to  under- 
stand what  is  the  proper  basis  for  a  bank-note  cir- 
culation, and  shall  not  be  surprised  if  the  bank-note 
issue  shrinks  to  nothing,  because  it  is  more  profitable 
to  sell  the  bonds  than  to  hold  them  as  a  basis  for  note 
issue.  When  a  bank-note  currency  is  based  upon  a 
security  which  varies  in  market  value,  no  matter 
Iwhat  may  be  the  monetary  needs  of  the  country,  if 


224  BANKING,  CREDIT  AND  FINANCE 

there  is  more  profit  in  selling  the  bonds  than  in 
taking  out  notes  thereon,  the  bonds  will  be  sold." 

§  256.  Insolvent  Banks. — If  the  bank  impairs  its 
capital,  the  Comptroller  of  the  Currency  notifies  the 
directors  and  calls  upon  them  to  make  good  the  defi- 
cit. In  case  they  fail  to  do  so,  the  Comptroller  de- 
clares the  bank  insolvent  and  places  it  in  the  hands 
of  a  receiver.  In  this  the  Comptroller  is  fortified  by 
the  decisions  of  the  Supreme  Court  of  the  United 
States.  His  judgment  must  control.  When  he  de- 
clares that  a  bank  is  insolvent,  there  is  no  power  in 
the  courts  of  the  United  States  to  gain  say  that,  and 
he  is  clothed  with  the  power  to  appoint  a  receiver  to 
take  charge  of  the  assets. 

There  was,  for  instance,  the  case  of  a  bank  in 
Tacoma  which  an  examiner  reported  as  having  only 
a  reserve  of  6  per  cent  whereas  the  requirement  w^as 
15  per  cent,  as  it  was  in  all  but  five  or  six  large 
cities,  known  as  reserve  cities,  where  twenty-five 
per  cent  was  required.  The  Comptroller  ordered 
the  examiner  to  declare  the  bank  insolvent.  The 
directors  got  out  an  injunction,  but  the  judge  de- 
clared that,  while  he  thought  it  was  aU  wrong  for  the 
Comptroller  of  the  Currency  to  have  more  power 
than  the  President  and  Congress,  he  could  not  do 
anything  but  let  him  take  charge  of  the  bank  if  he  so 
desired.  This  power  vested  in  the  Comptroller  re- 
quires impartial  action  over  all  banks  that  come^ 
under  his  control.  i 

§  257.  Responsibility  of  the  Office.— The  office 
differs  from  any  other  office  in  Washington  because 
there  is  absolutely  no  routine.  Every  case  is  an  in- 
dividual case,  and  the  Comptroller  must  exercise  in- 


THE  COMPTROLLER'S  OFFICE  225 

dividual  judgment  in  every  instance  The  great  re- 
sponsibility that  attaches  to  the  office  is  due  to  the 
fact  that  the  bank  is  the  only  necessity  in  every  com- 
munity that  affects  every  business  enterprise.  The 
failure  of  the  bank  takes  out  of  the  business  channels 
of  the  conmunity  more  or  less  of  the  funds,  and  cur- 
tails the  credit  of  the  community. 

That  was  particularly  so  during  the  panic  of  1893. 
During  the  thirty  years  of  the  existence  of  the  office 
prior  to  that  time  there  had  been  182  failures  of 
national  banks.  During  the  first  two  weeks  of  the 
incumbency  of  James  H.  Eckels  as  Comptroller  there 
were  165  failures.  The  result  of  the  failure  of  so 
many  banks  was  seriously  to  embarrass  many  com- 
munities, and  the  effect  was  very  far-reaching.  He 
concluded  to  give  a  bank  opportunity  to  do  business 
if  he  found  its  management  sound  and  honest.  It 
would  be  assumed  that  a  bank  having  failed  once, 
and  having  suspicion  attached  to  it,  could  never  suc- 
ceed in  obtaining  the  confidence  of  the  public.  Mr. 
Eckels  tried  the  experiment,  laying  down  certain 
conditions  which  were  to  be  complied  with  on  the 
part  of  the  directors  of  the  bank.  Of  the  165  that 
failed  he  thus  opened  115,  and  100  of  these  proved 
to  be  very  successful  institutions. 

There  w^ere  many  banks  that  did  not  fail,  but  were 
close  to  the  point,  and  the  question  with  the  Comp- 
troller was  whether  to  close  them  at  once  or  run  the 
risk  of  their  failure  with  ensuing  disaster  to  the  com- 
munity. There  was  one  instance  where  he  considered 
for  a  long  time  the  advisability  of  closing  a  prominent 
bank  in  the  Northwest.  The  institution  had  enjoyed 
high  credit,  but,  because  of  investing  in  notes  based 


226  BANKING,  CREDIT  AND  FINANCE 

on  land  booms  in  the  neighborhood,  the  credit  was 
seriously  impaired.  The  examiner  insisted  that  the 
bank  should  be  closed,  but  the  Comptroller  felt  that 
he  should  take  the  risk.  However,  he  put  on  it  an 
assessment  of  considerable  size.  Many  of  the  stock- 
holders came  to  see  him,  and  they  finally  concluded 
to  pay  the  assessment,  and  that  bank  is  now  the  larg- 
est in  its  State. 

§  258.  Liquidation  of  Assets. — As  a  result  of  bad 
banking  or  mistaken  banlving,  banks  are  very  likely 
to  get  themselves  loaded  up  with  assets  not  easily 
realizable,  and  when  the  pinch  comes  they  fail  and  go 
into  the  hands  of  a  receiver.  The  liquidation  of  these 
assets  is  not  an  easy  problem,  especially  as  the  law 
requires  that  the  receiver  shall  recommend  what  shall 
be  done  with  this  or  that  asset,  that  the  Comptroller 
shall  approve,  and  that  the  district  court  shall  enter 
a  decree  authorizing  the  sale. 

While  it  is  provided  that  the  bank  shall  not  loan 
upon  real  estate,  a  good  many  banks  get  such  security 
by  making  a  loan  and  then  taking  additional  security 
in  the  form  of  a  mortgage.  In  the  failure  of  banks 
a  good  deal  of  such  paper  is  found.  There  are  many 
assets  of  a  strange  character.  At  one  time  the 
Comptroller  had  a  full  equipment  for  an  opera  house; 
he  had  in  a  Dakota  town  a  butcher  shop;  he  had  any 
amount  of  live  stock,  one  trotting  horse,  which  sold 
for  $10,000.  In  Puget  Sound  a  certain  bank  had  as 
a  part  of  its  assets  enough  cans  to  can  a  large  portion 
of  the  salmon  caught  in  the  Columbia  river.  And 
there  is  hardly  a  thing  you  could  name,  from  an  ar- 
ticle of  wearing  apparel  to  a  large  manufactory,  that 


THE  COMPTROLLER'S  OFFICE  227 

at  some  time  or  other  does  not  in  this  way  get  into 
the  hands  of  the  Comptroller. 


Questions  for  Review,  Chapter  XI. 

1.  What  are  the  general  duties  of  the  Comptroller  of 
the  Currency? 

2.  What  provisions  were  made  in  the  Act  of  1863  for 
keeping  the  office  of  Comptroller  out  of  politics? 

3.  Does  the  affiliation  of  the  office  with  the  Treasury 
Department  prevent  its  independence? 

4.  What  are  the  functions  of  the  organization  depart- 
ment in  the  Comptroller's  office? 

5.  What  are  the  functions  of  the  redemption  department  ? 

6.  What  is  the  function  of  the  issuing  department? 

7.  What  must  be  set  forth  in  the  application  for  the 
creation  of  a  national  bank? 

3.     Are  the  great  powers  of  the  Comptroller  derived  from 
legislative  enactment? 

9.    How  are  the  national  bank  examiners  appointed? 

10.  What  are  the  duties  of  the  examiners? 

11.  To  whom  do  the  bank  examiners  report? 

12.  What  objections  have  been  urged  to  the  method  of 
issuing  bank  note  currency? 

13.  What  is  the  course  taken  by  the  Comptroller  if  a 
bank  impairs  its  capital? 

14.  In  what  respect  does  the  office  of  the  Comptroller 
differ  from  any  other  in  Washington? 

15.  What  responsibi'ity  falls  upon  the  Comptroller  with 
respect  to  the  liquidation  of  the  bank's  assets? 


CHAPTER  XII 

Monetary  System  of  the  U.  S. 

Section  259.  Gold  and  Silver  Coinage. — In  1786 
the  Congress  of  the  Confederation  chose  as  the  mone- 
tary unit  of  the  United  States  the  dollar  of  375.64 
grains  of  pure  silver.  This  unit  had  its  origin  in  the 
Spanish  piaster  or  milled  dollar,  which  constituted 
the  basis  of  the  metallic  circulation  of  the  English 
colonies  in  America.  It  was  never  coined,  there  be- 
ing at  that  time  no  mint  in  the  United  States. 

The  act  of  April  2, 1792,  established  the  first  mone- 
tary system  of  the  United  States.  The  bases  of  the 
system  were:  The  gold  dollar  or  unit,  containing 
24.75  grains  of  pure  gold,  and  stamped  in  pieces  of 
$10,  $5,  and  $2^/2,  denominated  respectively  eagles, 
half  eagles,  and  quarter  eagles;  the  silver  dollar  or 
unit,  containing  371.25  grains  of  pure  silver.  A  mint 
w^as  established.  The  coinage  was  unlimited,  and 
there  was  no  mint  charge.  The  ratio  of  gold  to  silver 
in  coinage  was  1  to  15.  Both  gold  and  silver  were 
legal  tender.    The  standard  was  double. 

The  act  of  1792  undervalued  gold,  which  was  there- 
fore exported.  The  act  of  June  28,  1834,  was  passed 
to  remedy  this,  by  changing  the  mint  ratio  between 
the  metals  to  1  to  16.002.  This  latter  act  fixed  the 
weight  of  the  gold  dollar  at  25.8  grains,  but  lowered 

228 


MONETARY  SYSTEM  OF  THE  U.  S.  229 

the  fineness?  from  0.916  2/3  to  0.899225.  The  fine 
weight  of  the  gold  dollar  was  thus  reduced  to  23.2 
grains.  The  act  of  1834  undervalued  silver,  as  that 
of  1792  had  undervalued  gold,  and  silver  was  at- 
tracted to  Europe  by  the  more  favorable  ratio  of  1 
to  151/2.  The  act  of  January  18,  1837,  was  passed  to 
make  the  fineness  of  the  gold  and  silver  coins  uni- 
form. The  legal  weight  of  the  gold  dollar  was  fixed 
at  25.8  grains  and  its  fine  weight  at  23.22  grains. 
The  fineness  was  therefore  changed  bv  this  act  to 
0.900  and  the  ratio  to  1  to  15.988. 

Silver  continued  to  be  exported.  The  act  of 
February  21,  1853,  reduced  the  weight  of  the  silver 
coins  of  denominations  of  less  than  $1,  which  the  acts 
of  1792  and  1837  had  made  exactly  proportional 
to  the  weight  of  the  silver  dollar,  and  provided  that 
they  should  be  legal  tender  to  the  amount  of  only  $5. 
Under  the  acts  of  1792  and  1837  they  had  been  full 
legal  tender.  By  the  act  of  1853  the  legal  weight  of 
the  half-dollar  was  reduced  to  192  grains  and  that  of 
the  other  fractions  of  a  dollar  in  proportion.  The 
coinage  of  the  fractional  parts  of  the  dollar  was  re- 
served to  the  Government. 

§>  260.  Provisions  of  the  Act  of  1873.— The  act  of 
February  12, 1873,  provided  that  the  unit  of  value  of 
the  United  States  should  be  the  gold  dollar  of  the 
standard  weight  of  25.8  grains,  and  that  there  should 
be  coined,  besides,  the  following  gold  coins :  A  quarter 
eagle,  or  2I/2  dollar  piece;  a  three-dollar  piece;  a  half- 
eagle  or  5  dollar  piece;  an  eagle,  or  ten-dollar  piece, 
and  a  double  eagle,  or  20-dollar  piece,  all  of  a  stand- 
ard weight  proportional  to  that  of  the  dollar 
piece.     These  coins  were  made  legal  tender  in  all 


230  BANKING,  CREDIT  AND  FINANCE 

payments  at  their  nominal  value  when  not  below 
the  standard  weight  and  limit  of  tolerance  provided 
in  the  act  for  the  single  piece,  and  when  reduced  in 
weight  they  should  be  legal  tender  at  a  valuation  in 
proportion  to  their  actual  w^eight.  The  silver  coins 
provided  for  by  the  act  were  a  trade  dollar,  a  half 
dollar,  or  50-cent  piece;  a  quarter  dollar,  and  a  10 
cent  piece;  the  weight  of  the  trade  dollar  to  be  420 
grains  troy;  the  half-dollar  I21/2  grams;  the  quarter 
dollar  and  the  dime,  respectively,  one-half  and  one- 
fifth  the  weight  of  the  half  dollar.  These  silver  coins 
were  made  legal  tender  at  their  nominal  value  for  anv 
amount  not  exceeding  $5  in  any  one  payment.  The 
charge  for  converting  standard  gold  bullion  into  coin 
was  fixed  at  one-fifth  of  1  per  cent.  Owners  of  silver 
bullion  were  allowed  to  deposit  it  in  any  mint  of  the 
United  States,  to  be  formed  into  bars  or  into  trade 
dollars,  and  no  deposit  of  silver  for  other  coinage 
was  to  be  received. 

Section  2  of  the  joint  resolution  of  Congress  of 
July  22,  1876,  recited  that  the  trade  dollar  should 
not  thereafter  be  legal  tender,  and  that  the  Secretary 
of  the  Treasury  should  be  authorized  to  limit  the 
coinage  of  the  same  to  an  amount  suificient  to  meet 
the  export  demand  for  it.  The  act  of  February  19, 
1887,  retired  the  trade  dollar  and  prohibited  its  coin- 
age. That  of  September  26,  1890,  discontinued  the 
coinage  of  the  one-dollar  and  3-dollar  gold  pieces. 

g  261.  The  Silver  Act  of  1878.— The  act  of  Feb- 
ruary 28,  1878,  directed  the  coinage  of  silver  dollars 
of  the  weight  of  412%  grains  troy,  of  standard  sil- 
ver as  provided  in  the  act  of  January  18,  1837,  and 
that  such  coins,  with  all  standard  silver  dollars  there- 


MONETARY  SYSTEM  OF  THE  U.  S.  231 

tofore  coined,  should  be  legal  tender  at  their  nomi- 
nal value  for  all  debts  and  dues,  public  and  private, 
except  where  otherwise  expressly  stipulated  in  the 
contract. 

The  Secretary  of  the  Treasury  was  authorized 
and  directed  by  the  first  section  of  the  act  to  purchase 
from  time  to  time  silver  bullion  at  the  market  price 
thereof,  not  less  than  $2,000,000  worth  nor  more  thaji 
$4,000,000  worth  per  month,  and  to  cause  the  same 
to  be  coined  monthly,  as  fast  as  purchased,  into 
such  dollars.  A  subsequent  act,  that  of  July  14, 1890, 
directed  that  the  Secretary  of  the  Treasmy  should 
purchase  silver  bullion  to  the  aggregate  amount  of 
4,500,000  ounces,  or  so  much  thereof  as  might 
be  offered,  each  month,  at  the  market  price  thereof, 
not  exceeding  $1  for  371.25  grains  of  pure  silver, 
and  to  issue  in  payment  thereof  Treasury  notes  of 
the  United  States,  such  notes  to  be  redeemable  by 
the  Government,  on  demand  in  coin,  and  to  be  legal 
tender  in  payment  of  all  debts,  public  and  private  ex- 
cept where  otherwise  expressly  stipulated  in  the  con- 
tract. 

The  act  directed  the  Secretary  of  the  Treasury  to 
coin  each  mouth  2,000,000  ounces  of  the  silver  bul- 
lion purchased  under  the  provisions  of  the  act  into 
standard  silver  dollars  until  the  first  day  of  July, 
1891,  and  thereafter  as  much  as  might  be  necessary 
to  provide  for  the  redemption  of  the  Treasury  notes 
issued  under  the  act.  The  purchasing  clause  of  the 
act  of  July  14,  1890,  was  repealed  by  the  act  of  No- 
vember 1, 1893. 

§  262.  The  Standard  of  Value.— In  providing  for 
the  coinage  of  the  precious  metals  Congress  estab- 


232  BANKING,  CREDIT  AND  FINANCE 

lished,  by  the  act  of  April  2,  1792,  the  standard  of 
value,  consisting  of  certain  gold  and  silver  coins, 
at  a  ratio  of  15  to  1— that  is  to  say,  the  value  of  an 
ounce  of  fine  gold  was  in  effect  declared  to  be  equal 
to  the  value  of  fifteen  ounces  of  fine  silver. 

A  list  of  the  coins  authorized  by  the  act  of  April  2, 
1792,  with  the  weights  and  fineness,  will  be  found 
on  a  following  page.  Both  gold  and  silver  coins  were 
declared  to  be  standards. 

The  ratio  of  15  to  1  was  adopted  in  pursuance 
of  investigations  conducted  by  Alexander  Hamilton, 
Secretary  of  the  Treasury,  who,  in  his  report  upon 
the  subject,  said  that  15  to  1  was  a  near  approxima- 
tion of  the  commercial  value  of  the  two  metals. 
It  was  soon  discovered,  however,  that  gold  at  the 
ratio  of  15  to  1  was  undervalued,  and  silver  be- 
came practically  the  only  metallic  money  available 
for  use  in  the  United  States.  In  1834  the  ratio  was 
changed  to  16.002  to  1,  and  in  1837  it  was  changed 
to  15.988  to  1.  That  is  the  present  ratio  and  is  com- 
monly called  16  to  1.  By  this  change  silver  was 
undervalued  and  gold  came  into  use  in  its  place. 

By  the  act  of  February  12, 1873,  the  coinage  of  the 
standard  silver  dollar  was  discontinued,  and  the 
gold  doUar  of  25.8,  grains  of  standard  gold,  .900 
fine,  was  declared  to  be  the  unit  of  value.  The  subse- 
quent restoration  of  the  coinage  of  silver  dollars 
under  the  act  of  February  28,  1878,  was  on  Gov- 
ernment account,  and  did  not  restore  the  silver  dollar 
to  its  former  place  as  a  standard  of  value. 

But  while  Congress  provided  for  the  so-called  dou- 
ble or  bimetallic  standard,  such  double  standard  has 


MONETARY  SYSTEM  OF  THE  U.  S.  233 

never  been  effective  in  the  United  States.  From 
1792  to  1834  silver  was  the  metal  by  which  all  values 
were  measured,  and  since  1834  gold  has  been  and  still 
is  the  sole  actual  standard. 

§  263.  Coins  and  Paper  Currency.— There  are 
twelve  different  kinds  of  money  in  circulation  in 
the  United  States,  namely,  gold  coins,  standard  sil- 
ver dollars,  subsidiary  silver,  gold  certificates,  silver 
certificates,  Treasury  notes  issued  under  the  act  of 
July  14, 1890,  United  States  notes  (also  called  green- 
backs and  legal  tenders),  national  bank  notes,  fed- 
eral reserve  notes,  federal  reserve  bank  notes,  and 
nickel  and  bronze  coins.  These  forms  of  money  are 
all  available  as  circulation.  While  they  do  not  all 
possess  the  full  legal-tender  quality,  each  kind  has 
such  attributes  as  to  give  it  currency.  The  status  of 
each  kind  is  as  follows: 

Gold  coin  is  legal  tender  at  its  nominal  or  face 
value  for  all  debts,  public  and  private,  when  not 
below  the  standard  weight  and  limit  of  tolerance 
prescribed  by  law;  and  when  below  such  standard 
and  limit  of  tolerance  it  is  legal  tender  in  proportion 
to  its  weight. 

Standard  silver  dollars  are  legal  tender  at  rheir 
nominal  or  face  value  in  payment  of  all  debts,  pub- 
lic and  private,  without  regard  to  the  amount,  except 
where  otherwise  expressly  stipulated  in  the  con- 
tract. 

Subsidiary  silver  is  legal  tender  for  amounts  not 
exceeding  $10  in  any  one  payment. 

Treasury  notes  of  the  act  of  July  14,  1890,  are 
legal  tender  for  all  debts,  public  and  private,  except 


234  BANKING,  CREDIT  AND  FINANCE 

where  otherwise  expressly  stipulated  in  the  con- 
tract. 

Federal  reserve  notes  and  Federal  reserve  bank 
notes — see  Chapter  IX. 

United  States  notes  are  legal  tender  for  all  debts, 
public  and  private,  except  duties  on  imports  and  in- 
terest on  the  public  debt. 

(United  States  notes,  upon  resumption  of  specie 
payments,  January  1,  1879,  became  acceptable  in 
payment  of  duties  on  imports  and  have  been  freely 
received  on  that  account  since  the  above  date.) 

Gold  certificates,  silver  certificates,  and  national 
bank  notes  are  not  legal  tender,  but  both  classes  of 
certificates  are  receivable  for  all  public  dues,  while 
national  bank  notes  are  receivable  for  all  public  dues 
except  duties  on  imports,  and  may  be  paid  out  by 
the  Government  for  all  salaries  and  other  debts  and 
demands  owing  by  the  United  States  to  individuals, 
corporations,  and  associations  within  the  United 
States,  except  interest  on  the  public  debt  and  in  re- 
demption of  the  national  currency.  All  national 
banks  are  required  by  law  to  receive  the  notes  of 
other  national  banks  at  par. 

The  minor  coins  of  nickel  and  copper  are  legal 
tender  to  the  extent  of  25  cents. 

§  264.  Gold  Coins. — The  coinage  of  legal-tender 
gold  was  authorized  by  the  first  coinage  act  passed 
by  Congress,  April  2, 1792. 

The  gold  unit  of  value  is  the  dollar,  which  con- 
tains 25.8  grains  of  standard  gold  .900  fine.  The 
amount  of  fine  gold  in  the  dollar  is  23.22  grains,  and 
the  remainder  of  the  weight  is  an  alloy  of  copper. 


MONETARY  SYSTEM  OF  THE  U.  S.  235 

While  the  gold  dollar  is  the  unit  and  standard  of 
value,  the  actual  coinage  of  the  $1  piece  was  discon- 
tinued under  authority  of  the  act  of  September  26, 
1890.  Gold  is  now  coined  in  denominations  of  $2.50, 
$5,  $10,  and  $20,  called  respectively,  quarter  eagles, 
half  eagles,  eagles,  and  double  eagles. 

The  total  coinage  of  gold  by  the  mints  of  the 
United  States  from  1792  to  June  30,  1919,  was  $3,- 
410,407,527,  of  which  it  w^as  estmiated  that  about 
half  was  in  existence  as  coin  in  the  United  States, 
while  the  remainder  represented  the  excess  of  ex- 
ports over  imports  and  the  amount  consumed  in  the 
arts. 

The  basis  for  the  estimate  of  the  amount  of  gold 
coin  in  the  United  States  was  established  in  1873, 
w^hen  the  amount  in  the  vaults  of  the  national  banks 
and  in  the  Treasury  was  ascertained  from  reports  to 
be  $71,188,548.  To  this  was  added  $20,000,000  as  an 
estimate  of  the  amount  of  gold  in  use  on  the  Pacific 
coast,  $10,000,000  as  the  amount  held  by  all  other 
banks  and  by  the  people  and  $3,818,086  in  national 
banks.  The  amount  thus  ascertained  was  $105,006,- 
634,  to  which  have  been  added  each  year  the  new 
coinage  reported  by  the  Director  of  the  Mint  and  the 
imports  as  showm  by  the  custom  house  reports,  and 
from  which  have  been  deducted  the  exports  and  the 
amounts  consumed  in  the  arts.  It  will  be  seen  that 
one-half  of  the  gold  coins  struck  at  the  mints  of  the 
United  States  have  disappeared  from  circulation. 

§  265.  Silver  Coins. — The  principal  silver  coin  is 
the  dollar,  w^hich  contains  4121^  grains  of  standard 
silver  .900  fine.  The  amount  of  fine  silver  in  the  dol- 
lar is  37114  grains,  and  there  are  4II/4  grains  of  cop- 


236  BANKING,  CREDIT  AND  FINANCE 

per  alloy.  The  standard  silver  dollar  was  first 
authorized  by  the  act  of  April  2,  1792.  Its  weight 
was  416  grains  .8924  fine.  It  contained  the  same 
quantity  of  fine  silver  as  the  present  dollar,  whose 
weight  and  fineness  were  established  by  the  act  of 
January  18, 1837.  The  coinage  of  the  standard  silver 
dollar  was  discontinued  by  the  act  of  February  12, 
1873,  and  it  was  restored  by  the  act  of  February  28, 
1878.  The  total  amount  coined  from  1792  to  1873 
was  $8,031,238,  and  the  amount  coined  from  1878  to 
December  31,  1904,  when  the  coinage  was  discon- 
tinued, was  $570,272,610.  The  coinage  ratio  between 
gold  and  silver  under  the  act  of  1792  was  15  to  1, 
but  by  the  acts  of  1834  and  1837  it  was  changed  first 
to  16.002  to  1  and  finally  to  15.988  to  1  (commonly 
called  16  to  1).    This  is  the  present  ratio. 

§  266.  Subsidiary  Silver. — The  silver  coins  of 
smaller  denominations  than  one  dollar,  authorized 
by  the  act  of  April  2,  1792,  were  half  dollars,  quarter 
doUars,  dimes,  and  half  dimes.  They  were  the  equiv- 
alent in  value  of  the  fractional  parts  of  a  dollar 
which  they  represented — that  is,  two  half-dollars 
were  equal  in  weight  to  one  silver  dollar,  and  so  on. 
These  coins  were  full  legal  tender  when  of  standard 
weight,  and  those  of  less  than  full  weight  were  legal 
tender  -at  values  proportional  to  their  respective 
weights. 

By  the  act  of  February  21,  1853,  the  weight  of  the 
fractional  silver  coins  was  reduced  so  that  the  half 
dollar  weighed  only  192  grains,  and  all  the  smaller 
denominations  were  reduced  in  proportion.  Their 
legal-tender  quality  was  at  the  same  time  limited  to 
$5,  and  they  thus  became  subsidiary  coins.    The 


MONETARY  SYSTEM  OF  THE  U.  S.  287 

present  subsidiary  coins  are  half  dollars,  quarter  dol- 
lars, and  diiues.  Their  weight  is  slightly  different 
from  that  prescribed  by  the  act  of  1853;  but  the  Imiit 
of  their  legal-tender  quality  has  been  raised  to  $10. 
There  was  a  period,  from  1862  to  1876,  when  there 
was  no  fractional  silver  coin  in  circulation  in  the 
United  States  except  on  the  Pacific  coast.  During 
this  period  the  small  change  of  the  country  consisted 
of  fractional  paper  currency,  which  is  described  be- 
low. 

§  267.  Issue  of  Silver  Dollars  and  Subsidiary 
Silver. — Standard  silver  dollars  are  issued  by  the 
Treasurer  and  assistant  treasurers  in  redemption  of 
silver  certificates  and  Treasury  notes  of  1890,  and 
are  sent  by  express,  at  the  expense  of  the  Govern- 
ment, in  sums  or  multiples  of  $500,  for  silver  certifi- 
cates or  Treasury  notes  deposited  with  the  Treasurer 
or  any  assistant  treasurer. 

Upon  the  deposit  of  an  equivalent  sum  in  United 
States  currency  or  national  bank  notes  with  the 
Treasurer  or  any  assistant  treasurer  or  national 
bank  depositary,  subsidiary  silver  coin  will  be  paid 
in  any  amount  by  the  Treasurer  or  assistant  treas- 
urers in  the  cities  where  their  several  offices  are,  or 
wiU  be  sent  by  express,  in  sums  of  $200  or  more,  at 
the  expense  of  the  Government,  or  by  registered 
mail,  at  the  risk  of  the  consignee,  in  packages  of  $50, 
registration  free,  from  the  most  convenient  Treasury 
office,  to  the  order  of  the  depositor.  For  this  purj^ose 
drafts  may  be  sent  to  the  Treasurer  or  the  assistant 
treasurer  in  New  York,  payable  in  their  respective 
cities  to  the  order  of  the  officer  to  whom  sent. 


238  BANKING,  CREDIT  AND  FINANCE 

§  268.    The  Silver  Act  of  1890. 

An  Act  Directing  the  purchase  of  silver  bullion  and  the 

issue  of  Treasury  notes  thereon,  and  for  other  purposes. 

(Public— No.  214.     1890.) 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled.  That 
the  Secretary  of  the  Treasury  is  hereby  directed  to  purchase, 
from  time  to  time,  silver  bullion  to  the  aggregate  amount  of 
four  million,  five  hundred  thousand  ounces,  or  so  much 
thereof  as  may  be  offered  in  each  month,  at  the  market  price 
thereof,  not  exceeding  one  dollar  for  three  hundred  and  sev- 
enty-one and  twenty-five  hundredths  grains  of  pure  silver, 
and  to  issue  in  payment  for  such  purchases  of  silver  bullion 
Treasury  notes  of  the  United  States  to  be  prepared  by  the 
Secretary  of  the  Treasury,  in  such  form  and  of  such  de- 
nominations, not  less  than  one  dollar  nor  more  than  one 
thousand  dollars,  as  he  may  prescribe ;  and  a  sum  sufficient 
to  carry  into  effect  the  provisions  of  this  act  is  hereby  ap- 
propriated, out  of  any  money  in  the  Treasury  not  otherwise 
appropriated. 

Sec.  2.  That  the  Treasury  notes  issued  in  accordance 
with  the  provisions  of  this  act  shall  be  redeemable  on  de- 
mand, in  coin,  at  the  Treasury  of  the  United  States,  or  at  the 
office  of  any  assistant  treasurer  of  the  United  States,  and 
when  so  redeemed  may  be  reissued,  but  no  greater  or  less 
amount  of  such  notes  shall  be  outstanding  at  any  time  than 
the  cost  of  the  silver  bullion  and  the  standard  silver  dollars 
coined  therefrom,  then  held  in  the  Treasury  purchased  by 
such  notes  and  such  Treasury  notes  shall  be  a  legal  tender 
in  payment  of  all  debts,  public  and  private,  except  where 
otherwise  expressly  stipulated  in  the  contract,  and  shall  be 
receivable  for  customs,  taxes,  and  all  public  dues,  and  when 
so  received  may  be  reissued ;  and  such  notes,  when  held  by 
any  national  banking  association,  may  be  counted  as  a  part 
of  its  lawful  reserve.  That  upon  demand  of  the  holder  of 
any  of  the  Treasury  notes  herein  provided  for  the  Secretary 
of  the  Treasury  shall,  under  such  regulations  as  he  may  pre- 
scribe, redeem  such  notes  in  gold  or  silver  coin,  at  his  dis- 
cretion, it  being  the  established  policy  of  the  United  States 
to  maintain  the  two  metals  on  a  parity  with  each  other  upon 


MONETARY  SYSTEM  OF  THE  U.  S.  239 

the  present  legal  ratio,  or  such  ratio  as  may  be  provided 
by  law. 

Sec.  3.  That  the  Secretary  of  the  Treasury  shall  each 
month  coin  two  million  ounces  of  the  silver  bullion  pur- 
chased under  the  provisions  of  this  act  into  standard  silver 
dollars  until  the  first  day  of  July,  eighteen  hundred  and 
ninety-one,  and  after  that  time  he  shall  coin  of  the  silver 
bullion  purchased  under  the  provisions  of  this  act  as  much 
as  may  be  necessary  to  provide  for  the  redemption  of  the 
Treasury  notes  herein  provided  for,  and  any  gain  or  seign- 
iorage arising  from  such  coinage  shall  be  accounted  for  and 
paid  into  the  Treasury. 


§  269.  Meaning  of  16  to  1.— The  phrase  "13  to 
1/^  as  applied  to  coinage,  means  that  the  mint  value 
of  16  ounces  of  silver  shall  be  equal  to  the  mint  value 
of  1  ounce  of  gold,  that  is,  that  16  ounces  of  silver 
shall  be  coinable  into  as  many  standard  silver  dollars 
as  one  ounce  of  gold  is  coinable  into  standard  gold 
dollars. 

§  270.  Standard  Bullion. — Standard  bullion  con- 
tains 900  parts  of  pure  gold  or  pure  silver  and  100 
parts  of  copper  alloy. 

The  coining  value  of  an  ounce  of  pure  gold  is  $20.- 
67183  and  the  coining  value  of  an  ounce  of  standard 
gold  is  $18.60465. 

The  coining  value  in  standard  silver  dollars  of  an 
ounce  of  pure  silver  is  $1.2929  and  the  coining  value 
of  an  ounce  of  standard  silver  is  $1.1636. 

§  271.  What  Is  Seigniorage?— The  term  seign- 
iorage, as  used  in  the  United  States,  means  the  profit 
arising  from  the  coining  of  bullion.  The  Govern- 
ment does  not  purchase  gold  bullion,  but  coins  it  on 
private  account.    There  is  no  profit  from  the  coinage 


240  BANKING,  CREDIT  AND  FINANCE 

of  gold  bullion,  the  face  value  of  gold  coins  being  the 
same  as  their  bullion  value,  but  at  the  present  ratio 
of  16  to  1  the  face  value  of  the  silver  dollar  may  be 
greater  than  its  bullion  value ;  therefore  when  silver 
bullion  is  purchased  and  coined  into  dollars  there  is  a 
profit  arising  from  such  coinage,  the  amount  of 
which  depends  upon  the  price  paid  for  the  bullion. 
For  example,  there  are  37114  grains  of  pure  silver 
in  a  dollar  and  there  are  480  grains  of  pure  silver  in 
a  fine  ounce.  The  coinage  value  of  a  fine  ounce  is, 
therefore,  $1.2929.  If  the  fine  ounce  can  be  purchased 
for  70  cents,  the  profit  of  its  coinage  (the  seigniorage) 
is  $0.5929 — ,  and  the  profit  on  the  3711/4  grains  of 
pure  silver  in  the  single  dollar  is  $0.4586 — ,  which 
is  the  difference  between  the  actual  cost  of  the  bul- 
lion in  the  dollar  and  the  nominal  value  of  the  coin. 

The  silver  purchased  by  the  Government  is  car- 
ried on  the  books  of  the  Treasury  at  its  actual  cost, 
and  the  seigniorage  is  declared  on  the  coinage  of 
each  month  and  paid  into  the  Treasury. 

§  272.  Coinage  of  Gold. — In  the  United  States 
there  is  free  and  unlimited  coinage  of  gold,  that  is, 
standard  gold  bullion  may  be  deposited  at  the  mints 
in  any  amount,  to  be  coined  for  the  benefit  of  the  de- 
positor, without  charge  for  coinage;  but  when  other 
than  standard  buUion  is  received  for  coinage  a 
charge  is  made  for  parting,  or  for  refining,  or  for  cop- 
per alloy,  as  the  case  may  be.  Refining  is  the  elim- 
ination from  the  bullion  of  all  base  metals.  Parting- 
is  the  separation  of  any  silver  which  may  be  con- 
tained in  the  bullion.  The  charges  for  these  opera- 
tions vary  according  to  the  actual  expenses.  "When 
copper  is  added  for  alloy,  a  charge  of  2  cents  per 


MONETARY  SYSTEM  OF  THE  U.  S.  241 

ounce  is  made  for  the  anioimt  actually  added.  The 
depositor  receives  in  gold  coin  the  full  value  of  the 
gold  in  his  bullion,  less  such  charges  as  are  indicated 
above. 

The  mints  may  lawfully  refuse  to  receive  gold 
bullion  of  less  value  than  $100,  or  when  it  is  too 
base  for  coinage;  but  in  practice  deposits  of  gold 
bullion  are  accepted  without  regard  to  amounts,  and 
rejected  only  when  too  base  for  coinage. 

§  273.  Coinage  of  Silver. — Under  existing  law 
in  the  United  States  subsidiary  silver  is  coined  only 
on  Government  account.  This  coinage  is  made  from 
bullion  purchased  by  the  Government  under  the  pro- 
visions of  section  3526,  Revised  Statutes,  and  the 
profits  on  such  coinage  belong  to  the  Government. 

The  total  amount  of  silver  bullion  purchased 
under  the  act  of  July  14,  1890,  from  August  13,  1890, 
the  date  the  act  w^ent  into  effect,  to  November  1, 1893, 
the  date  of  the  repeal  of  the  purchasing  clause  of 
that  act,  was  168,674,682.53  fine  ounces  of  silver  cost- 
ing $155,931,002.25. 

There  were  coined  from  the  bullion  purchased 
under  the  act  of  July  14,  1890,  187,027,345  standard 
silver  dollars,  of  which  $134,285,166  represent  the 
cost  of  the  bullion  coined,  and  which  was  held  in 
the  Treasury  for  the  redemption  of  Treasury  notes  of 
1890,  while  the  remainder  $52,742,179,  constitute  the 
gain  or  seigniorage,  and  being  the  property  of  the 
United  States,  was  paid  into  the  Treasury  of  the 
United  States  to  be  used  as  other  available  funds. 

Under  the  acts  of  March  14,  1900,  and  March  2, 
1903,  there  were  coined  to  July  1,  1905,  from  the 


242  BANKING,  CREDIT  AND  FINANCE 

silver  bullion  purchased  under  the  act  of  July  14, 
1890,  $33,118,576  in  subsidiary  silver  coin,  of  which 
$21,583,300  represent  the  cost  of  the  bullion  con- 
tained in  such  coinage  and  for  which  an  equal 
amount  of  Treasury  notes  of  1890  were  retired,  and 
the  balance,  $11,535,276,  seigniorage  paid  into  the 
Treasury. 

The  seigniorage  is  an  addition  to  the  volume  of 
money  in  the  country,  while  the  silver  coin  repre- 
senting the  cost  of  the  bullion  is  not,  since  it  is  paid 
out  only  in  redemption  of  the  Treasury  notes  of  1890, 
whereupon  the  latter  are  canceled  and  retired,  as 
prescribed  by  the  acts  of  July  14,  1890,  and  March 
14,  1900. 

The  total  expenditure  by  the  United  States  for 
silver  bullion  exclusive  of  subsidiaiy  silver  coin- 
age, is: 

Under  act  of  February  28,  1878 $308,297,260.71 

Under  act  of  July  14,  1890 155,931,002.00 

Total  $464,210,262.71 

There  have  been  coined  from  the  bullion  thus  pur- 
chased standard  silver  dollars  of  the  face  value  of 
$570,272,610,  and  subsidiary  silver  coin  of  the  face 
value  of  $33,118,576,  consuming  the  entire  amount  of 
bullion  piu^chased  under  the  act  of  July  14, 1890. 

§  274.  Trade  Dollars.— The  trade  dollar  of  420 
grains  troy  was  authorized  by  the  act  of  February 
12, 1873.  It  was  intended  for  circulation  in  oriental 
countries  as  a  substitute  for  the  Mexican  dollar, 
which  it  slightly  exceeded  in  weight;  but  by  the 


MONETARY  SYSTEM  OF  THE  U.  S.  243 

terms  of  the  authorizing  act  it  was  made  legal  tender 
in  the  United  States  in  smns  not  exceeding  $5. 

This  legal  tender  quality  was  withdrawn  by  the 
joint  resolution  approved  July  22, 1876,  and  the  coin- 
age was  limited  to  such  amount  as  the  Secretary  of 
the  Treasury  should  consider  sufficient  to  meet  the 
export  demand.  The  act  of  February  19,  1887,  pro- 
vided for  the  retirement  of  trade  dollars  and  their 
recoinage  into  standard  silver  dollars  or  subsidiary 
silver.  For  six  months  after  the  passage  of  the  act 
they  could  be  exchanged  at  the  Treasury  or  any  sub- 
treasury,  dollar  for  dollar,  for  standard  silver  dollars 
or  subsidiary  coin. 

The  total  number  of  trade  dollars  coined  was  35,- 
965,924.  The  number  redeemed  under  the  act  of  1887 
was  7,689,036,  and  from  the  bullion  resulting  fiom 
the  melting  of  these  dollars  there  were  coined  in  sub- 
sidiary silver  $2,668,674.30,  and  into  standard  silver 
$5,078,472.  Since  the  expiration  of  the  period  of  re- 
demption above  mentioned,  trade  dollars  have  been 
purchased  as  bullion  when  presented  at  the  mints 

§  275.  Free  and  Unlimited  Coinage  of  Silver.— This 

term,  as  used  in  the  discussion  of  the  coinage  ques- 
tion, means  the  right  of  any  person  to  deposit  stand- 
ard silver  bullion  in  any  amount  at  the  mints  of  the 
United  States  and  have  it  coined  at  the  expense  of 
the  Government,  such  depositor  to  receive  for  his 
bullion  silver  coins  containing  in  the  aggregate  the 
same  weight  of  fine  silver  as  brought  to  the  mint. 

§  276.  Unlimited  Coinage. — Coinage  may  be  unlim- 
ited without  being  entirely  free.  It  would  be  un- 
limited if  any  owner  of  bullion  had  the  right  to  de- 


244  BANKING,  CREDIT  AND  FINANCE 

posit  it  at  the  mint  and  have  it  converted  into  coins 
without  any  restrictions  as  to  the  amount. 

§  277.  Sales  of  Gold.— During  the  period  of  the 
suspension  of  specie  payments  in  the  United  States 
— January  1,  1862,  to  January  1,  1879 — the  customs 
revenues  of  the  Govermnent  were  collected  in  gold. 
A  sufficient  amount  of  this  gold  was  reserved  to  meet 
that  portion  of  the  interest  on  the  public  debt  which 
was  payable  in  coin,  and  the  remainder  was  sold 
from  time  to  tune  for  currency  at  the  market  price 
by  the  several  assistant  treasurers  of  the  United 
States,  under  instructions  from  the  Secretary  of  the 
Treasury.  The  currency  so  obtained,  with  the  cur- 
rency collected  from  internal  revenue  and  from  other 
sources,  was  used  to  defray  the  ordinary  expenses 
of  the  Government.  The  sui-plus,  if  any,  was  applied, 
as  far  as  it  would  go,  to  the  redemption  of  the  law- 
ful-money obligations  as  they  fell  due,  and  after 
their  maturity  to  the  purchase  of  bonds  at  the  market 
price. 

The  total  amount  of  gold  sold  was  $526,506,273.81, 
and  the  currency  received  therefor  amoimted  to  $633,- 
334,089.67.  The  average  premium  obtained  was  20.3 
per  cent. 

§  278.  Redemption  of  Currency. — Gold  coins  and 
standard  silver  dollars,  being  standard  coins  of  the 
United  States,  are  not  *' redeemable.'' 

Subsidiary  coins  and  minor  coins  may  be  presented, 
in  sums  or  multiples  of  $20,  to  the  Treasurer  of  the 
United  States  or  to  an  assistant  treasurer  for  re- 
demption, or  exchange  into  lawful  money. 

United  States  notes   are  redeemable  in  United 


MONETARY  SYSTEM  OF  THE  U.  S.  245 

States  gold  coin  in  any  amount  by  the  Treasurer  and 
and  all  the  assistant  treasurers  of  the  United  States. 

Treasury  notes  of  1890  are  redeemable  in  United 
States  gold  coin  in  any  amount  by  the  Treaasurer 
and  all  the  assistant  treasurers  of  the  United  States. 

National  bank  notes  are  redeemable  in  lawful 
money  of  the  United  States  by  the  Treasurer,  but 
not  by  the  assistant  treasurers.  They  are  also  re- 
deemable at  the  bank  of  issue.  In  order  to  provide 
for  the  redemption  of  its  notes  when  presented 
every  national  bank  is  required  by  law  to  keep  on 
deposit  with  the  Treasurer  a  sum  equal  to  5  per  cent 
of  its  circulation. 

Gold  certificates  being  receipts  for  gold  coin,  are 
redeemable  in  such  coin  by  the  Treasurer  and  all 
assistant  treasurers  of  the  United  States. 

Silver  certificates  are  receipts  for  standard  silver 
dollars  deposited,  and  are  redeemable  in  such  dol- 
lars only. 

"Coin"  obligation  of  the  Government  are  re- 
deemed in  gold  coin  when  gold  is  demanded  and  in 
silver  w^hen  silver  is  demanded. 

§  279.  Foreign  Coins  Not  Legal  Tender.— Sec- 
tion 3584  of  the  Revised  Statutes  of  the  United 
States  provides  that  no  foreign  coins  shall  be  a  legal 
tender  in  the  United  States. 

§  280.    Denominations,  Weight  and  Fineness  of 
the  Coins  of  the  United  States. 


GOLD. 

Denomination 

Fine  gold 

Alloy  con- 

Weight 

contained 

tained* 

Grains 

Grains 

Grains 

One  dollar  ($1)    

23.22 

2.58 

25.80 

246 


BANKING,  CREDIT  AND  FINANCE 


Quarter  eagle  ($2.50) 58.05  6.45  64.50 

Three  dollars  ($3)  69.66  7.74  77.40 

Hah   eagle   ($5)    116.10  12.90  129.00 

Ea- le  ($10)   232.20  25.80  258.00 

DouGle  easle  ($20)   464.40  51.60  516.00 

*The  alloy  neither  adds  to  nor  detracts  from  the  value  of 
the  coin. 

SILVER. 

Denomination                Fine  silver  Alloy  con-  Weight 

contained  tained 

Grains  Grains  Grains 

Standard  dollar 371.25  41.25  412.50 

Half  dollar 173.61  19.29  192.90 

Quarter  dollar 86.805  9.645  96.45 

Dime 34.722  3.858  38.58 

Prior  to  the  act  of  February  21,  1853,  all  silver  coins  were 
legal  lender  in  all  payments  whatsoever.  The  act  of  Feb- 
ruary 21,  1853,  reduced  the  weight  of  all  silver  coins  of  less 
denomination  than  the  silver  dollar  about  7  per  cent,  to  be 
coined  on  Government  account  only,  and  made  them  legal 
tender  in  payment  of  debts  for  all  sums  not  exceeding  $5. 

MINOR. 

Denomination  Fine  copper     Alloy  con-      Weight 

contained         tained 
Grains  Grains  Grains 

Five  cents* 57.87  19.29  77.16 

One   centt    45.60  2.40  48. 

''"Seventy-five  per  cent  copper,  25  per  cent  nickel, 
t  Ninety-five  per  cent  copper,  5  per  cent  tin  and  zinc. 

Troy  weights  are  used,  and  while  metric  weights 
are  by  law  assigned  to  the  half  and  quarter  dollar 
and  dime,  troy  weights  still  continue  to  be  employed, 
15,432  grains  being  considered  as  the  equivalent  of 
a  gram,  agreeably  to  the  act  of  July  28,  1866. 

The  weight  of  $1,000  in  United  States  gold  coin 
is  53.75  troy  ounces,  equivalent  to  3.68  pounds  avoir- 
dupois. The  weight  of  $1,000  in  standard  silver  dol- 
lars is  859.375  troy  ounces,  equivalent  to  58.92  pounds 


MONETARY  SYSTEM  OF  THE  U.  S.  247 

avoirdupois,  and  the  weight  of  $1,000  in  subsidiary- 
silver  is  803.75  troy  ounces,  equivalent  to  55.11 
pounds  avoirdupois. 

§  281.  Paper  Money.— The  first  paper  money  ever 
issued  by  the  Government  of  the  United  States  was 
authorized  by  the  acts  of  July  17  and  August  5, 1861. 
The  notes  issued  were  called  "demand  notes,"  be- 
cause they  were  payable  on  demand  at  certain 
designated  subtreasuries.  They  were  receivable  for 
all  public  dues,  and  the  Secretary  was  authorized 
to  reissue  them  when  received,  but  the  time  within 
which  such  reissues  might  be  made  was  limited  to 
December  31,  1862.  The  amount  authorized  by 
these  acts  was  $50,000,000.  An  additional  issue  of 
$10,000,000  was  authorized  by  the  act  of  February 
12,  1862,  and  there  were  reissues  amounting  to  $30,- 
000.  The  demand  notes  were  paid  in  gold  when  pre- 
sented for  redemption  and  they  were  received  for  all 
public  dues,  and  these  two  qualities  prevented  their 
depreciation.  All  other  United  States  notes  de- 
preciated in  value  from  1862  until  the  resumption  of 
specie  payments. 

The  act  of  February  25,  1862,  provided  for  the 
substitution  of  United  States  notes  in  place  of  the 
demand  notes,  and  the  latter  were  therefore  canceled 
when  received.  By  July  1,  1863,  all  except  $3,770,- 
000  had  been  retired,  and  nearly  three  millions  of 
this  small  remainder  were  canceled  during  the  next 
year.  These  notes  were  not  legal  tender  when  first 
issued,  but  they  were  afterwards  made  so  by  the  act 
of  March  17,  1862. 

§  282.  United  States  Notes.— The  principal  issue 
of  United  States  paper  money  was  officially  called 


-248  BANKING,  CREDIT  AND  FINANCE 

United  States  notes.  These  were  the  well-known 
"greenbacks"  or  "legal  tenders."  The  act  of  Feb- 
ruary 25,  1862,  authorized  the  issue  of  $150,000,- 
000,  of  which  $50,000,000  were  in  lieu  of  an  equal 
amount  of  demand  notes,  and  could  be  issued  only 
as  the  demand  notes  were  canceled.  A  second  issue 
of  $150,000,000  was  authorized  by  the  act  of  July  11, 
1862,  of  which,  however,  $50,000,000  was  to  be  a 
temporary  issue  for  the  redemption  of  a  debt  known 
as  the  temporary  loan.  A  third  issue  of  $150,000,000 
was  authorized  by  the  act  of  March  3,  1863.  The 
total  amount  authorized,  including  the  temporary 
issue,  was  $450,000,000,  and  the  highest  amount  out- 
standing at  any  time  was  $449,338,902  on  January 
30,  1864. 

The  reduction  from  the  original  permanent  issue 
of  $400,000,000  to  $346,681,016  was  caused  as  follows; 
The  act  of  April  12,  1866,  provided  that  United 
States  notes  might  be  retired  to  the  extent  of  $10,- 
000,000  during  the  ensuing  six  months,  and  that 
thereafter  they  might  be  retired  at  the  rate  of  not 
more  than  $4,000,000  per  month.  This  authority  re- 
mained in  force  until  it  was  suspended  by  the  act  of 
February  4,  1868.  The  authorized  amount  of  reduc- 
tion during  this  period  was  about  $70,000,000,  but 
the  actual  reduction  was  only  about  $44,000,000.  No 
change  was  made  in  the  volume  of  United  States 
notes  outstanding  until  after  the  panic  of  1873,  when, 
in  response  to  popular  demand,  the  Government  re- 
issued $26,000,000  of  the  canceled  notes. 

This  brought  the  amount  outstanding  to  $382,000,- 
000,  and  it  so  remained  until  the  resumption  act  of 
January  14, 1875,  provided  for  its  reduction  to  $300,- 


MONETARY  SYSTEM  OF  THE  U.  S.  249 

000,000.  The  process  was,  however,  a-gain  stopped 
by  the  act  of  May  31,  1878,  which  required  the  notes 
to  be  reissued  when  redeemed.  At  that  time  the 
amount  outstanding  was  $346,681,016,  which  is  the 
present  amount.  The  volume  outstanding  is  undunin- 
ished  because  of  the  provisions  of  the  act  of  May 
31,  1878,  which  require  the  notes  so  redeemed  to  be 
paid  out  again  and  kept  in  circulation. 

The  act  of  March  14, 1900,  also  dii^ected  the  reissue 
of  United  States  notes  when  redeemed,  but  they  must 
first  be  exchanged  for  gold  as  provided  in  the  said 
act.  The  act  also  provides  that  when  silver  certifi- 
cates of  large  denominations  are  canceled,  and  small 
denominations  issued  in  their  place,  a  like  volume 
of  small  United  States  notes  shall  from  time  to  time 
be  canceled  and  notes  of  $10  and  upward  issued  in 
substitution  therefor. 

§  283.  Gold  Certificates.— The  act  of  March  3, 
1863,  authorized  the  Secretary  of  the  Treasury  to 
receive  deposits  of  gold  coin  and  bullion  in  sums 
not  less  than  $20,  and  to  issue  certificates  there- 
for in  denominations  not  less  than  $20,  said  certifi- 
cates to  be  receivable  for  duties  on  imports.  Under 
this  act  deposits  of  gold  were  received  and  certifi- 
cates issued  until  January  1, 1879,  when  the  practice 
was  discontinued  by  order  of  the  Secretary  of  the 
Treasury.  The  purpose  of  the  order  was  to  prevent 
the  holders  of  United  States  notes  from  presenting 
them  for  redemption  in  gold,  and  re-depositing  the 
gold  in  exchange  for  gold  certificates.  No  certifi- 
cates were  issued  after  January  1,  1879,  until  the 
passage  of  the  bank  act  of  July  12,  1882,  which  au- 
thorized and  directed  the  Secretary  of  the  Treasury 


250  BANKING,  CREDIT  AND  FINANCE 

to  receive  gold  coin  and  bullion  and  issue  certificates. 

This  act,  however,  provided  that  "the  Secretary 
of  the  Treasury  shall  suspend  the  issue  of  gold  certifi- 
cates whenever  the  amount  of  gold  coia  and  gold 
bullion  in  the  Treasury,  reserved  for  the  redemption 
of  United  States  notes,  falls  below  one  hundred 
million  of  dollars/'  The  act  of  March  14,  1900,  re- 
enacted  this  provision,  and  further  provided  that  the 
Secretary  may,  in  his  discretion,  suspend  such  issue 
whenever  and  so  long  as  the  aggregate  amount  of 
United  States  notes  and  silver  certificates  in  the 
general  fund  of  the  Treasury  shall  exceed  $60,000,000. 
It  provided  further  that  of  the  amount  of  such  certifi- 
cates outstanding  one-fourth,  at  least,  shall  be  in  de- 
nominations of  $50  or  less.  The  act  of  July  12,  1882, 
made  them  receivable  for  customs,  taxes,  and  ail 
public  dues. 

§  284.  Silver  Certificates. — The  act  of  February 
28,  1878,  authorizing  the  issue  of  the  standard  silver 
dollars,  provided  that  any  holder  of  such  dollars 
might  deposit  them  in  sums  not  less  than  $10  with 
the  Treasurer  or  any  assistant  treasurer  of  the 
United  States  and  receive  certificates  therefor,  in  de- 
nominations not  less  than  $10,  said  certificates  to  be 
receivable  for  customs,  taxes,  and  all  public  dues. 
The  act  of  August  4, 1886,  authorized  the  issue  of  the 
smaller  denominations  of  $1,  $2,  and  $5.  Silver 
certificates  have  practically  taken  the  place  in  cir- 
culation of  the  standard  silver  dollars  which  they 
represent.  The  act  of  March  14,  1900,  provided  that 
thereafter  the  issue  of  silver  certificates  should  be 
limited  to  the  denominations  of  $10  and  under,  except 
that  10  per  cent  of  the  total  volume  of  such  certifi- 


MONETARY  SYSTEM  OF  THE  U.  S.  251 

cates,  in  the  discretion  of  the  Secretary  of  the  Treas- 
ury, may  be  issued  in  denominations  of  $20,  $5U,  and 
$100.  Neither  silver  certificates  nor  silver  dollars 
are  redeemed  in  gold. 

§  285.    Treasury  Notes,  Act  of  July  14,  1890.— 

These  notes  were  authorized  by  the  act  of  July  14, 
1890,  commonly  called  the  "Sherman  Act."  The 
Secretary  of  the  Treasury  was  directed  to  purchase 
each  month  4,500,000  ounces  of  fine  silver  at  the  mar- 
ket price,  and  to  pay  for  the  same  with  Treasury 
notes  redeemable  on  demand  in  coin  and  legal  i  ender 
for  all  debts,  public  and  private,  except  where  other- 
wise expressly  stipulated  in  the  contract.  1 1  was 
provided  in  the  act  that  when  the  notes  should  be  re- 
deemed or  received  for  dues  they  might  be  reissued, 
but  that  no  greater  or  less  amount  of  such  notes 
should  be  "outstanding  at  any  time  than  the  cost  of 
the  silver  bullion  and  the  standard  silver  dollars 
coined  therefrom,  then  held  in  the  Treasury  pur- 
chased by  such  notes." 

The  authority  for  the  purchase  of  silver  bullion 
imder  this  act  was  repealed  by  the  act  of  November 
1,  1893,  up  to  which  date  the  Government  had  pur- 
chased 168,674,682.53  fine  ounces,  at  a  cost  of  $155,- 
931,002,  for  which  Treasury  notes  were  issued.  Treas- 
ury notes  redeemed  in  standard  silver  dollars  are 
canceled  and  retired  in  accordance  with  the  require- 
ments of  the  act  of  1890.  Sections  5  and  8  of  the  act 
of  March  14,  1900,  also  provide  for  the  cancellation 
and  retirement  of  Treasury  notes  to  an  amoimt 
equal  to  the  coinage  of  standard  silver  dollars  and 
subsidiary  silver  from  the  bullion  purchased  with 
such  notes. 


252  BANKING,  CREDIT  AND  FINANCE 

§  286.  Fractional  Currency. — When  specie  pay- 
ments were  suspended,  about  January  1,  1862,  both 
gold  and  silver  coins  disappeared  from  circulation. 
The  place  of  the  subsidiary  silver  coins  was  for  a 
time  supplied  by  the  use  of  tickets,  due  bills,  and  other 
forms  of  private  obligations,  which  were  issued  by 
merchants,  manufacturers,  and  others  whose  busi- 
ness required  them  to  ''make  change."  Congress 
soon  interfered,  and  authorized,  first,  the  use  of 
postage  stamps  for  change;  second,  a  modified  form 
of  postage  stamp  called  postal  cuiTency,  and  finally, 
fractional  paper  currency  in  denominations  corres- 
ponding to  the  subsidiary  silver  coins.  The  highest 
amount  authorized  was  $50,000,000.  The  highest 
amount  outstanding  at  any  time  was  $49,102,660.27, 
and  the  amount  still  outstanding,  though  not  in  use 
as  money,  is  $15,245,183.88,  of  which  $8,375,934  is 
officially  estimated  to  have  been  destroyed. 

§  287.  National  Bank  Currency. — The  issue  of 
circulating  notes  by  national  banking  associations 
was  first  authorized  by  an  act  entitled  ''An  act  to 
provide  a  national  currency  secured  by  a  pledge  of 
United  States  stock,  and  to  provide  for  the  circula- 
tion and  redemption  thereof,''  approved  February 
25,  1863,  which  act  was  repealed  by  an  act  entitled 
"An  act  to  provide  a  national  cuiTency  secured  by  a 
pledge  of  United  States  bonds,  and  to  provide  for 
the  circulation  and  redemption  thereof,"  approved 
June  3,  1864.  The  act  approved  June  3,  1864,  with 
subsequent  amendments  thereof,  was  embodied  in 
the  Revised  Statutes  of  the  United  States  in  1873. 
The  law  as  embodied  in  the  Revised  Statutes  has 
been  amended  from  time  to  time,  and  is  now  con- 


MONETARY  SYSTEM  OF  THE  U.  S.  253 

tained  in  what  is  known  as  tlie  national  bank  act, 
with  amendments  thereof. 

Material  amendments  have  been  made  to  the  na- 
tional bank  act  during  the  past  few  years.  The  first, 
dated  March  14,  1900,  authorized  the  foi-mation  of 
national  banks  with  minimum  capital  of  $25,000;  the 
issue  of  circulation  to  the  par  value  of  bonds  depos- 
ited, and  reduced  the  tax  on  circulation  secured  by 
2  per  cent  bonds  to  one-fourth  of  1  per  cent  semi- 
annually. 

The  act  of  June  22,  1906,  authorized  national 
banks  to  loan  to  one  interest  an  amount  not  in  excess 
of  10  per  cent  of  the  paid-in  capital  stock  and  surplus, 
the  aggregate,  however,  not  to  exceed  30  per  cent  of 
the  capital,  the  original  limitation  being  10  per  cent 
of  the  capital  stock. 

On  January  26,  1907,  an  act  was  approved  prohib- 
iting national  banks  or  other  cor]Dorations  organized 
by  authority  of  any  act  of  Congress  from  making 
money  contributions  in  connection  with  political 
elections. 

At  the  following  session  of  CongreBS  the  banking 
law  was  further  amended  authorizing  the  organiza- 
tion of  national  currency  associations  and  the  issue 
to  bank  members  of  such  associations  of  additional 
circulation  on  securities  including  commercial  paper 
held  by  the  national  banking  associations.  The  act 
further  authorized  the  deposit  with  the  Treasurer 
of  the  United  States,  in  trust,  of  State,  municipal, 
etc.,  bonds,  as  security  for  circulation,  but  provided 
that  additional  circulation  can  only  be  issued  to 
banks  having  an  unimpaired  capital,  and  surplus 
equal  to  20  per  cent  of  the  capital,  and  whose  circula- 


254  BANKING,  CREDIT  AND  FINANCE 

tion  secured  by  United  States  bonds  amounts  to  at 
least  40  per  cent  of  their  capital  stock.  Additional 
circulation  however,  can  only  be  issued  at  such  times 
and  under  such  conditions  as,  in  the  judgment  of  the 
Secretary  of  the  Treasury,  an  increase  in  national 
bank  circulation  is  warranted. 

See  chapter  IX,  on  the  Federal  Reserve  System 
as  it  applies  to  bank  circulation. 

§  288.  Security. — Under  the  provisions  of  exist- 
ing law  a  national  bank  is  required  to  deposit  in- 
terest-bearing bonds  or  notes  of  the  United  States 
with  the  United  States  Treasurer  as  security  for  its 
circulating  notes  in  the  following  minimum  amounts: 

(a)  Banks  with  a  capital  not  exceeding  $150,000 
must  deposit  bonds,  par  value,  to  an  amount  not  less 
than  one-fourth  of  their  capital  stock. 

(b)  Banks  with  a  capital  exceeding  $150,000  must 
deposit  bonds  to  the  amount  of  at  least  $50,000,  par 
value. 

Circulating  notes  are  issued  against  United  States 
bonds  deposited  as  security  therefor  to  the  par  value 
of  the  bonds  or  of  the  market  value,  if  the  bonds  are 
below  par,  the  maximum  amount  issuable  on  bonds 
being  measured  by  the  paid-in-capital  stock. 

§  289.  Profits  on  Circulation. — Tables  published 
annually  by  the  Comptroller  of  the  Currency  show 
the  profit  arising  from  a  bank  investing  its  funds  in 
bonds  and  taking  out  circulation  thereon,  compared 
with  the  profits  from  investment  of  the  same  funds 
at  6  per  cent  per  annum.  This  profit  varies  with  the 
cost  of  the  bonds  and  the  rates  of  interest  current 
where  a  bank  is  located. 


MONETARY    SYSTEM    OF    THE    U.    S.  255 

Questions  for  Review,  Chapter  XII. 

1.  What  were  the  bases  of  the  first  monetary  system 
of  the  United  States,  established  under  the  Act  of  April 
2,  1792? 

2.  What  coinage  was  provided  for  under  the  Act  of 
Congress  of  1873? 

3.  To  what  amount  are  the  subsidiary  silver  coins  of 
the  United  States  legal  tender? 

4.  To  what  amount  are  nickel  and  copper  coin  legal 
tender? 

5.  Why  was  the  ratio  of  15  to  1  adopted  by  Congress 
and  when  was  it  changed? 

B.  Has  the  so-called  double  or  bimetallic  standard  ever 
been  really  effective  in  the  United  States? 

7.  How  many  different  kinds  of  money  circulate  in  the 
United  States? 

8.  Under  what  conditions  is  gold  coin  legal  tender  for 
all  debts,  public  and  private? 

9.  Are  gold  certificates,  silver  certificates,  and  national 
bank  notes  receivable  for  all  public  dues? 

10.  What  is  the  weight  and  fineness  of  the  gold  unit  of 
value  ? 

11.  In  what  denominations  is  gold  now  coined  and  what 
are  the  coins  called  respectively? 

12.  How  are  standard  silver  dollars  issued  by  the  treas- 
urer and  assistant  treasurers  of  the  United  States? 

13.  What  were  the  provisions  of  the  Silver  Act  of  1890? 

14.  What  is  the  meaning  of  the  phrase  16  to  1  as  applied 
to  coinage? 

15.  What  is  the  meaning  of  free  and  unlimited  coinage 
of  gold  as  existing  in  the  United  States? 

16.  What  is  the  meaning  of  the  free  and  unlimited  coin- 
age of  silver? 

17.  What  was  the  nature  of  the  first  paper  money  ever 
issued  by  the  government  of  the  United  States? 


256  BANKING,  CREDIT  AND  FINANCE 

18.  When  were  the  well-known  "greenbacks"  or  "legal 
tenders"  issued,  and  in  what  quantity? 

19.  When  were  gold  certificates  first  issued  and  when  was 
the  practice  temporarily  discontinued? 

20.  What  do  the  silver  certificates  represent? 

21.  Are  silver  certificates  and  silver  dollars  redeemable 
in  gold  ? 

22.  What  were  the  provisions  of  the  so-called  Sherman 
Act  of  1890  with  regard  to  the  issue  of  Treasury  notes? 

23.  When  was  the  issue  of  circulating  notes  by  national 
banking  associations  first  authorized? 

24.  What  is  the  security  required  from  banks  for  their 
circulating  notes? 


CHAPTER  Xni 

Foreign  Exchange 

Note: — This  chapter  and  the  one  which  follows,  on  the  same  general 
subject,  are  from  the  pen  of  an  acknowledged  authority  on  Foreign 
Exchange,  Mr.  H.  K.  Brooks,  former  manager  of  the  Western  Finan- 
cial department  of  the  American  Express  Company  and  author  of  a 
comprehensive  textbook  on  the  subject.  A  few  changes  from  the 
original  text  have  been  made,  in  consequence  of  the  conditions  brought 
about  by  the  World  War,  but  the  matter  retains  its  full  value  for 
study  by  those  who  desire  authoritative  information  on  this  branch 
of  the  banking  business. — Editor. 

Section  290.  A  Branch  of  Banking. — ^While  for- 
eign-exchange transactions  are  generally  regarded 
as  being  quite  complicated,  and  there  are  some  opera- 
tions requiring  experience  and  patient  study,  the 
system  as  a  whole  cannot  be  said  to  be  any  more  in- 
tricate than  many  of  the  problems  daily  arising  in 
mercantile  business. 

Comparatively  few  persons  have  a  thorough  knowl- 
edge of  the  subject  and  this  may  perhaps  be  attrib- 
uted to  the  fact  that  until  recent  years  the  business 
was  confined  to  the  leading  banks  at  large  trade 
centers.  Other  banks  having  call  for  foreign  drafts, 
letters  of  credit,  or  other  foreign  paper  would  obtain 
the  same  from  the  large  banks  mentioned  or  refer 
customers  to  them  direct. 

The  enormous  growth  of  our  import  business,  the 
large  increase  in  foreign  travel,  and  the  extension  of 

257 


258  BANKING,  CREDIT  AND  FINANCE 

our  trade  to  nearly  every  country  in  the  world  so 
greatly  increased  the  volume  of  foreign  exchange 
transactions  that  it  naturally  invited  competition, 
and  today  almost  every  bank  and  financial  institu- 
tion at  a  place  of  any  importance  is  equipped  with 
the  facilities  necessary  to  meet  the  demand  for  this 
class  of  business  of  its  patrons. 

§  291.    Foreign  Departments  Supersede  Brokers. 

— American  merchants  who  formerly  imported  goods 
from  foreign  countries  through  brokers  at  seaport 
cities  now  have  foreigia  departments  for  the  trans- 
action of  the  business  direct.  Our  manufacturers, 
who  formerly  did  not  think  of  looking  beyond  the 
limits  of  this  country  for  a  market  for  their  goods, 
have  learned,  through  a  better  knowledge  of  the  con- 
ditions, that  they  can  successfully  compete  with  for- 
eign manufacturers.  Our  war  with  Spain  is  said  to 
have  opened  the  eyes  of  our  manufacturers  to  the 
fact  that  there  was  a  vast  population  outside  of  the 
United  States  who  were  dependent  for  many  com- 
modities upon  countries  which  were  in  no  better 
position,  geographically  or  otherwise,  to  supply  their 
needs;  and  if  we  judge  from  the  large  increase  in  our 
exports  since  that  war,  there  was,  no  doubt,  some 
foundation  for  the  statement.  The  World  War  still 
further  opened  our  eyes. 

§  292.  Opportunity  for  Students. — In  an  article 
published  in  one  of  the  leading  financial  papers  of 
New  York  it  was  stated  recently  that  the  demand 
among  bankers  and  large  mercantile  houses  for 
young  men  having  a  general  knowledge  of  foreign 
exchange  and  foreign  shipping  very  greatly  exceeds 
the  supply;  that  students  fitting  themselves  for  mer- 


FOREIGN  EXCHANGE  259 

cantile  life  should  devote  as  much  study  as  possible 
to  this  branch,  since  it  would  be  a  very  valuable 
acquisition  to  their  fitness  for  the  present  commercial 
business,  and  at  the  same  time  insure  a  higher 
appreciation  and  greater  salary  for  their  services 
than  is  usually  paid  for  other  branches  of  either 
mercantile  or  banking  business. 

§  293.  What  Foreign  Exchange  Is. — Foreign  ex- 
change is  a  system  by  which  commercial  nations 
discharge  their  debts  to  each  other.  This  indebted- 
ness may  represent  the  value  of  commodities  export- 
ed to  or  imported  from  other  countries,  money  bor- 
rowed, loaned,  or  invested  abroad,  and  the  interest 
profits  on  such  funds;  the  cost  for  transportation 
of  goods  and  the  connnissions  for  service;  the  expense 
incurred  in  traveling  in  foreign  countries; in  fact, any 
transactions  which  involve  the  remitting  of  money, 
or  anything  representing  money,  from  one  country 
to  another.  These  debts  have  to  be  paid  either  with 
cash  or  something  equally  satisfactory  to  the  credit- 
ors. The  cost  of  transmitting  gold  or  currency,  and 
the  risk  attending  the  same,  while  sometimes  re- 
sorted to,  are  generally  considered  too  great,  and 
it  is  to  avoid  this  risk  and  expense  that  the  system 
of  exchanging  debts  through  the  medimn  of  com- 
mercial paper  is  adopted. 

§  294.    Magnitude  of  Foreign  Trade.— One  can 

hardly  appreciate  the  magnitude  of  the  business 
between  the  United  States  and  foreign  countries 
which,  directly  or  indirectly,  is  transacted  through 
the  medium  of  the  system  we  teim  ''foreign  ex- 
change,''  without  resorting  to  actual  data  in  the 


260  BANKING,  CREDIT  AND  FINANCE 

shape  of  figures,  and  we  find  these  figures  so  large 
as  to  be  almost  incomprehensible. 

For  the  twelve  months  ending  June  30,  1920,  the 
value  of  the  goods  or  commodities  exported  from 
this  country  to  other  countries  amounted  to  $8,111,- 
039,733,  and  during  the  same  period  the  United 
States  imported  from  other  countries  goods  to  the 
value  of  $5,238,621,668  making  a  total  of  exports  and 
imports  during  the  fiscal  year  1920  of  $13,349,661,- 
401. 

The  value  of  the  goods  we  exported  exceeded  the 
value  of  those  imported  by  $2,872,418,065,  ,which 
amount  of  credit  in  our  favor  would,  had  there  been 
no  other  transactions  to  offset  it,  have  to  be  remitted 
to  us  from  the  various  foreign  countries.  But  against 
this  credit  in  our  favor  foreign  countries  charged  up 
to  us  the  amount  paid  out  on  letters  of  credit  used  by 
our  people  to  meet  expenses  in  travel  abroad — bal- 
ance due  on  loans  made  by  our  capitalists  to  float 
large  enterprises,  such  as  railroad  consolidations, 
etc.,  so  that,  notwithstanding  there  was  a  large  bal- 
ance due  us  in  the  difference  between  the  value  of  the 
goods  we  sold  to,  and  those  we  purchased  from 
foreign  countries,  it  was  offset  by  other  transactions, 
so  that  in  fact,  during  the  year  1920  we  exported 
more  gold  than  w^e  imported.  But  whether  the  bal- 
ance be  in  our  favor  or  against  us,  the  total  amount 
of  the  business  transacted  is  practically  all  handled 
through  the  medium  of  the  system  we  call  * 'foreign 
exchange,"  and  the  importance  of  a  thorough  knowl- 
edge of  the  system  in  its  various  details  is  becoming 
greater  each  year. 

§  295.    Knowledge    of    Monetary    Systems.— A 


FOREIGN  EXCHANGE  261 

knowledge  of  the  moneys  of  account,  or  monetary 
systems,  of  the  various  foreign  countries  is  one  of 
the  first  things  necessary  to  a  clear  understanding  of 
foreign  exchange  transactions. 

Paper  moneys,  such  as  government  and  bank  notes 
and  certificates,  are,  as  a  rule,  intended  solely  for 
circulation  within  the  country  in  which  issued,  and 
are  not  legal  tender  outside  of  the  country  from  which 
they  emanate.  Of  course,  paper  money  is  often 
accepted  in  small  amounts  for  its  full  face  value  in 
other  countries,  but  it  is  always  optional  with  the 
creditor  to  accept  it. 

Silver  and  minor  coins  are  also  intended  for  do- 
mestic use,  and  when  accepted  in  other  countries  it 
is  at  their  actual  intrinsic  value  rather  than  at  their 
face  value.  For  illustration:  The  purchasing  power 
of  the  silver  dollar  of  the  United  States  within  this 
country  is  as  great  for  small  sums  as  that  of  the  gold 
dollar,  but  in  other  countries  it  would  be  accepted 
only  for  its  bullion  value. 

§  296.     The  Only  International  Money.— Gold,  by 

virtue  of  commercial  usage  and  the  laws  of  the  various 
countries  of  the  world,  may  be  said  to  be  the  only 
international  money,  and  its  purchasing  power  is 
practically  the  same  all  over  the  civilized  world.  But 
it  must  be  remembered  that  the  value  of  gold  corns  is 
not  always  as  expressed  on  their  face.  In  large 
international  transactions  the  weight  of  the  mass 
is  regarded,  and  not  the  number  of  pieces,  and  their 
value  depends  upon  the  weight  and  fineness.  By 
** fineness"  is  meant  pure  metal.  Nearly  all  coins 
contain  alloy,  or  inferior  metal  which  is  added  to 
increase  their  durability. 


262  BANKING,  CREDIT  AND  FINANCE 

Tlie  value  or  price  of  the  gold  money  of  account  of 
commercial  countries  is  determined  by  the  weight 
and  fineness  of  the  metal  contained  therein,  which 
Aveight  and  fineness  are  established  by  the  mint 
laws  of  the  country  issuing  the  money.  It  is  there- 
fore essential  that  the  standard  of  weight  by  which 
the  various  moneys  of  account  are  established  si i all 
be  unvarying  and  have  the  highest  legal  sanct'on; 
otherwise  there  coidd  be  no  stability  of  values  ai^d  no 
such  thing  as  accurate  deductions  of  par  of  exchange. 
Gold  is  the  only  commodity  in  the  world  the  value  of 
which  is  established  by  law. 

The  price  of  gold  cannot  be  affected  either  by  an 
abundance  or  scarcity  of  the  supply.  No  matter 
how  large  the  supply,  our  mints,  or  the  Bank  of  Eng- 
land, will  buy  it  at  the  price  established  by  law;  and 
although  there  is  no  international  agreement  to  main- 
tain the  price,  the  fact  that  gold  is  accepted  by  the 
chief  commercial  nations  as  the  one  universal  meas- 
ure of  value,  operates  to  prevent  any  attempt  to 
change  its  valuation.  The  price  of  diamonds,  which 
are  more  valuable  than  gold,  is  affected  by  the  sup- 
ply and  demand.  Silver,  used  extensively  as  money, 
fluctuates  in  price  like  any  commodity,  the  supply 
and  demand  governing  its  value. 

§  297.    How  Gold  Shipments  Are  Handled.— As 

gold  shipments  between  the  United  States  and  for- 
eign countries,  particularly  Europe,  are  an  impor- 
tant factor  in  foreign-exchange  transactions,  it  is 
well  to  learn  how  they  are  handled  and  the  expense 
attending  them. 

Whether  in  coined  pieces  or  bars  (bullion),  the  gold 
is  packed  in  strong  kegs  or  boxes,  securely  strapped 


FOREIGN  EXCHANGE  263 

with  hoop  iron,  and  carefully  sealed  with  private 
seals;  the  latter  to  discover  if  tampered  with  en 
route.  Space  is  chartered  from  the  steamship  com- 
pany, as  in  the  case  of  merchandise,  although  nearly 
all  large  fast  steamers  have  rooms  especially  con- 
structed for  such  valuable  cargo.  At  a  cost  of  3/16 
of  1  per  cent,  or  $1,875  for  each  million  dollars  in 
value,  the  shipper  has  the  gold  insured  against  loss. 
The  steamship  company  charges  for  carrying  the 
shipment  as  freight  a  rate  of  about  1/8  per  cent  of 
its  value,  or  about  $1,250  for  each  million  dollars. 
As  an  extra  safeguard  in  case  of  large  shipments, 
the  steamship  company  details  special  anned  men 
to  guard  the  room  day  and  night,  and  sometimes  the 
shipper  emploj'^s  special  detectives  in  citizen's  clothes 
to  watch  the  passengers  on  the  trip,  since  it  is 
generally  known  several  days  in  advance  when  large 
shipments  of  gold  are  to  be  made. 

§  298.  Commercial  Bars  of  Gold. — In  accordance 
with  the  United  States  Mint  regulations,  a  charge  of 
four  cents  per  $100  is  made  for  what  are  known  as 
commercial  bars  of  gold,  which  are  from  990  to  997 
thousandths  fine.  The  shipper  has  to  pay  for  these 
bars  with  gold  coin,  w^hich  is  obtained  without  charge 
at  the  Subtreasury  in  exchange  for  gold  certificates 
or  for  legal  tender  notes.  There  is  no  restriction 
upon  the  withdrawals  of  gold  from  the  Subtreasury 
for  export,  and  the  shipper  has  the  option  of  taking 
coined  pieces,  if  he  prefers,  but  the  loss  by  abrasion 
of  coined  pieces  practically  equals  the  cost  of  4  cents 
per  $100  charged  by  the  mint  for  commercial  bars, 
which  are  put  up  in  that  shape  to  induce  exporters 
to  take  bars  instead  of  coined  pieces,  and  thus  save 


264  BANKING,  CREDIT  AND  FINANCE 

the  government  the  cost  of  coinage  as  well  as  the 
transportation  of  the  bullion  to  the  mint. 

§  299.  "Money  of  Account." — It  is  not  necessary 
to  recall  here  the  names  and  denominations  of  all  the 
coins  or  money  used  in  the  various  foreign  countries. 
The  money  of  account  of  the  principal  countries  has 
been  already  noted  (in  chapter  VI).  By  "money  of 
account"  we  mean  the  kind  of  money  in  which  the 
people  keep  their  accounts,  as,  for  example,  we  keep 
our  accounts  in  doUars  and  cents. 

§  300.  The  British  System. — Foremost  among  all 
foreign  nations  in  the  magnitude  of  its  commerce, 
its  vast  colonial  possessions  and  dependencies,  and 
consequently  its  importance  as  a  leading  financial 
center,  Great  Britain  furnishes  the  most  interesting 
study  of  the  money  of  the  world.  Every  school  child 
can  teU  you  the  money  of  account  of  Great  Britain. 
To  us  it  seems  a  complicated,  cumbersome  system. 
The  pound  sterling  is  equal  to  20  shillings,  each 
shilling  being  equal  to  12  pence,  and  each  penny  equal 
to  4  farthings.  Without  exception  the  sovereign  is 
the  most  universally  recognized  coin,  and,  except 
the  Egyptian  pound,  it  is  the  largest  of  all  units  of 
money.  Its  normal  (ante-bellum)  value  in  our 
money  is  about  $4.87. 

§  301.  *  *  Sterling' '  Exchange. — Probably  more  for- 
eign exchange  is  drawn  in  sterling — here  and  in  other 
countries  as  well — than  in  the  money  of  all  other 
countries  combined.  This  is  due,  however,  to  the  fact 
that  London  has  long  been  the  financial  center  of  the 
world,  and  exchange  on  that  city  is  generally  accept- 
able, if  not  prefeiTcd.    For  the  same  reason  prob- 


FOREIGN  EXCHANGE  265 

ably  90  per  cent  of  all  letters  of  credit  issued  through- 
out the  world  are  drawn  in  English  money. 

The  term  "rate  of  exchange"  means  the  value  or 
the  price  of  the  money  of  one  country  reckoned  in 
the  money  of  any  other  country,  the  value  being  a 
fixed  rate  of  exchange,  the  price  a  fluctuating  rate 
of  exchange. 

The  rate  of  exchange  quoted  between  any  two  comi- 
tries  is  for  drafts,  checks,  or  bills  of  exchange,  and  the 
price  includes,  besides  the  actual  equivalent  of  the 
standard  coin,  some  allowance  for  interest  according 
to  the  tenor  of  the  draft,  and  a  premium  which  the 
seller  demands  for  the  economy  and  superior  con- 
venience of  his  drafts  or  check  as  compared  with  a 
remittance  in  currency  or  bullion.  This  premium, 
which  represents  the  fluctuation,  is  more  or  less  ac- 
cording to  the  amount  of  exchange  in  the  market  for 
sale  and  the  demand  for  the  same. 

§  302.  Two  Kinds  of  Exchange. — There  are  two 
kinds  of  exchange — direct  and  arbitrated.  Direct  is 
when  between  any  two  coimtries;  arbitrated,  when 
between  two  places  in  different  countries  through  the 
medimn  of  some  other  place  in  another  country;  or, 
to  express  it  more  clearly,  the  remitting  of  money  to 
one  country  through  another  country,  or  the  buying 
of  exchange  of  one  country  through  another. 

The  occasion  for  the  arbitration  of  exchange  will 
arise  when  the  rate  of  exchange  here  direct  upon  a 
coimtry  to  which  you  wish  to  remit  is  much  higher 
than  between  that  country  and  another  near  by. 

For  illustration:  Through  the  financial  columns 
of  our  daily  papers,  or  by  tabled  infonnation  direct, 


266  BANKING,  CREDIT  AND  FINANCE 

the  rate  for  a  check  in  London  on  Paris  or  Berlin,  or 
vice  versa,  is  furnished.  Prior  to  the  World  War  it 
generally  read,  for  example,  this  way:  "Exchange 
on  Paris  F.  25.12;  exchange  on  Berlin  M.  20.42." 
This  signified  that  you  could  huy  in  London,  for 
instance,  a  check  payable  in  Paris  at  the  rate  of  25 
francs  12  centimes  per  pound  sterling,  or  on  Berlin  at 
the  rate  of  20  marks  42  pfennig  per  pound  sterling. 
Therefore,  if  you  had  occasion  to  remit  a  large  sum 
to,  say,  Berlin,  and  you  found  you  could  buy  a  check 
on  London  and  have  the  amount  remitted  from  Lon- 
don to  Berlin  cheaper  than  you  could  remit  to  Berlin 
direct,  the  transaction  would  be  termed  "arbitration 
of  exchange."  All  large  banking  houses  and  jobbers 
of  foreign  exchange  watch  the  quotations  on  ex- 
change between  countries  very  closely,  and  always 
avail  themselves  of  any  advantage  to  be  gained  by 
remitting  to  one  country  through  another. 

§  303.  The  Rate  of  Exchange. — The  fluctuation  in 
the  price  of  exchange,  or,  as  it  is  termed,  "the  rate  of 
exchange, ' '  is  due  to  a  number  of  causes.  If  the  value 
of  the  goods  we  exported  greatly  exceeded  the  value 
of  the  goods  we  imported  during  a  certain  period,  the 
large  balance  due  us  from  other  countries  would,  if 
there  were  no  other  international  transactions  to 
offset  them,  cause  the  price  of  exchange  here  to  be 
lower,  for  the  reason  that  there  would  be  less  demand 
for  remittance  to  foreign  countries,  since  it  is  always 
the  difference  between  the  debits  and  credits  that  is 
remitted.  On  the  other  hand,  if  we  owed  foreign 
countries  a  much  greater  amount  than  they  owed  us, 
exchange  here  w^ould  be  higher  by  reason  of  increased 
demand  for  it. 


FOREIGN  EXCHANGE  267 

But  it  is  not  alone  our  foreign  commercial  trade 
that  regulates  tlie  price  of  exchange.  The  monetary 
conditions  here  and  abroad  may  entirely  offset  other 
conditions,  as  we  have  seen  since  1914. 

When  the  loaning  rate  for  money  here  is  high, 
capitalists  and  bankers  will  loan  their  money  here, 
instead  of  investing  in  foreign  commercial  h)ills, 
which  causes  less  demand  for  bills,  hence  lower  rates. 
If  rates  for  money  abroad  are  high,  there  will  be  a 
greater  demand  for  commercial  bills  or  other  ex- 
change on  foreign  countries,  for  the  purpose  of  get- 
ting their  money  to  those  countries  to  take  advantage 
of  such  high  rates,  thereby  causing  higher  rates.  K 
the  rates  for  money  abroad  are  lower  than  here,  our 
capitalists  and  bankers  would  borrow  money  in  their 
markets  for  investment  here,  thus  increasing  our  in- 
debtedness to  foreign  countries,  and  when  such  loans 
became  due  there  would  be  an  increased  demand 
for  exchange  to  pay  these,  resulting  in  higher  rates. 

§  304.  Effect  of  Discount  Rates. — The  discount 
rates  at  London,  Paris,  Berlin,  and  other  European 
centers  very  materially  affect  the  buying  and  selling 
price  for  commercial  bills  drawn  against  commod- 
ities exported.  These  discount  rates  are  the  rate  per 
cent  at  which  commercial  paper  of  the  different 
classes  may  be  discounted— that  is,  the  allowance 
made  for  cashing  or  taking  up  the  paper  before  ma- 
turity or  before  due  and  payable.  These  discount 
rates  fluctuate  according  to  the  conditions  prevail- 
ing, as  does  the  rate  of  exchange.  When  discount 
rates  abroad  are  high,  the  rates  for  commercial  bills 
here  will  be  lower,  and  when  low  abroad,  the  rate  for 
commercial  bills  here  will  be  higher. 


268  BANKING,  CREDIT  AND  FINANCE 

Under  normal  conditions,  the  rates  for  foreign  ex- 
change fluctuate  between  what  are  termed  gold- 
exporting  or  gold-importing  points,  which  means  the 
actual  cost  of  the  gold  plus  the  cost  of  transporting 
it  from  one  point  to  another. 

For  example :  If  you  wished  to  remit,  say,  to  Lon- 
don the  equivalent  of  £50,000,  and  you  found  that  the 
cost  of  the  gold  coin  or  bullion  and  the  expense  of 
freight,  insurance,  commissions,  etc.,  would  be  con- 
siderably less  than  the  cost  of  a  draft  or  check  for 
the  amount  on  London,  then  you  would  ship  gold  in 
preference.  If  the  cost  were  equal  or  gTeater  for  ship- 
ping gold,  then  you  would  remit  by  check,  as  it  would 
be  more  convenient  and  less  risk.  Therefore  the  rates 
naturally  do  not  go  much  above  or  much  below  the 
gold  points. 

When  the  rate  for  demand  sterling  exchange  got 
down  to,  say,  $4.83%  to  $4.84  per  pound,  it  w^as 
formerly  cheaper  to  import  gold.  If  such  exchange 
reaches  as  high  as  $4,841/4  to  $4,881/2  per  pound,  then 
gold  could  be  exported  equally  cheaply. 

But  notwithstanding  these  various  conditions 
which  affect  the  market  price  for  foreign  exchange, 
it  is  the  supply  and  demand  that  regulate  the  price, 
as  in  the  case  of  wheat,  com,  or  any  commodity. 

§  305.  Par  of  Exchange. — ''Par  of  exchange" 
means  equal  of  exchange.  There  is  a  "mint  par  of 
exchange,"  and  also  w^hat  might  be  termed  a  ''com- 
mercial par  of  exchange." 

The  mint  par  of  exchange  between  the  United 
States  and  foreign  countries  is  the  actual  value  in 
our  money  of  the  pure  metal  contained  in  the  coins 


FOREIGN  EXCHANGE  269 

representing  the  units  of  money  of  the  various  coun- 
tries. The  Director  of  the  United  States  Mint  is  re- 
quired at  stated  periods  in  each  year  to  proclaim  the 
values  of  these  coins  or  units  in  our  money  for  the 
purpose  of  computing  the  worth  of  importations  of 
goods  and  also  the  amount  of  customs  duties  assessable 
thereon.  The  value  of  gold  coins,  as  fixed  by  the  Di- 
rector of  the  Mint,  rarely  ever  changes,  since  the 
weight  and  fineness  of  the  gold  units  of  countries  are 
fixed  by  law — in  the  United  States  by  act  of  Congress, 
in  Great  Britain  by  act  of  Parliament. 

The  mint  par  of  exchange  of  the  EngHsh  pound  or 
sovereign  in  our  money  was  in  noi-mal  peace  times 
$4.8665;  of  the  French  franc  and  the  franc  of  the 
Latin  Union  countries,  19.3  cents;  of  the  German 
mark,  23.8  cents;  of  the  Scandinavian  krone,  26.8 
cents;  and  of  the  Holland  gulden  or  guilder,  40,2 
cents;  and  for  many  years  it  was  the  same.  While 
these  values  as  furnished  are  not  exactly  correct, 
they  are  sufficiently  accurate  to  serve  the  purpose 
intended,  and  were  accepted  for  all  computations  at 
the  custom  houses. 

§  306.  To  find  the  Par  of  Exchange.— In  order  to 
determine  the  actual  mint  par  of  exchange  between 
any  two  countries,  it  is  necessary  only  to  divide  the 
weight  of  the  pure  gold  in  the  gold  irnit  of  one  coun- 
try by  the  weight  of  the  pure  gold  in  the  coin  of  the 
other  country.  The  mint  par  of  exchange  between  the 
United  States  and  countries  having  silver  monetary 
units  is  arrived  at  in  the  same  way,  but  as  the  price 
of  silver  fluctuates,  the  value  of  silver  coins  fi'e- 
quently  changes. 

As  an  illustration  of  how  the  pai*s  of  exchange 


270  BANKING,  CREDIT  AND  FINANCE 

are  arrived,  at,  we  will  take  for  example  the  mint  par 
of  exchange  between  the  United  States  and  Great 
Britain.  Our  gold  dollar  (which  is  our  unit  of  monej' 
of  account)  weighs  gxoss  25.8  troy  grains  and  is  9/10 
line,  1/10  alloy  being  allowed  to  increase  its  durabil- 
ity, which,  if  deducted,  leaves  23.22  troy  grains  of 
pure  gold.  The  sovereign  contains  gross  123.274478 
troy  grains  and  is  11/12  fine,  which  leaves  the  pure 
gold  in  the  sovereign  113.001603  troy  grains,  which 
if  divided  by  23.22,  the  pure  gold  in  the  United 
States  dollar,  gives  $4.866560,  the  mint  par  of  ex- 
change. 

If  you  divide  the  normal  value  of  the  sovereign 
($4.8665)  by  20  (there  being  20  shillings  to  the 
pound),  it  will  give  you  the  actual  value  of  the 
shilling  in  our  money,  or  if  you  divide  it  by  240,  the 
number  of  pence  to  the  pound,  it  will  give  you  the 
value  of  the  penny  in  our  money  (a  fraction  over  2 
cents). 

§  307.  Commercial  Par  of  Exchange. — ^Now,  as 
to  the  commercial  par  of  exchange,  if  you  add  to  the 
mint  par  of  exchange  between  two  countries  the  cost 
of  transferring  the  coin  or  bullion,  which  involves 
freight  charges,  insurance,  interest,  commissions,  and 
sometimes  discounts,  jou  will  arrive  at  what  would 
be  termed,  under  normal  conditions,  the  * '  commercial 
par  of  exchange,''  or  the  amount  necessary  to  dis- 
charge a  debt  of  a  merchant  in  one  coimtry  to  a  mer- 
chant in  another  country. 

In  further  illustration  of  the  commercial  par  of 
exchange,  if  the  United  States  owed  England  exactly 
the  same  amount  that  England  owed  us,  the  debts 
between  these  two  countries  could  be  paid  without 


FOREIGN  EXCHANGE  271 

the  intervention  of  money,  and  the  commercial  price 
of  exchange  would  be  at  par.  If,  however,  we  owed 
England  a  greater  amount  than  it  owed  us,  exchange 
here  would  be  higher,  and  in  England  lower,  and 
vice  versa.  In  other  words,  exchange  in  the  United 
States  would  be  at  a  premium,  and  in  England  at  a 
discount,  the  premium  in  one  case  being  about  equal 
to  the  discount  in  the  other. 

§  308.  Quotations  of  Rates. — Quotations  for  for- 
eign exchange,  such  as  checks,  drafts,  commercial 
bills,  etc.,  are  rarely  understood  except  by  those 
familiar  with  the  business.  In  quoting  the  rate  of 
exchange  for  drafts,  checks,  etc.,  on  countries  other 
than  France,  Germany,  and  sometimes  Italy,  the  rate 
quoted  is  per  single  unit,  that  is,  so  much  in  our 
money  per  pound  sterling  on  England;  krone  on  Nor- 
way, Sweden,  and  Denmark ;  ruble  on  Russia,  etc. 

Exchange  on  France  and  Germany,  when  quoted 
by  dealers  at  smaller  places,  would  be  the  same — so 
much  per  single  franc  or  mark;  but  in  the  lar^^er 
cities  it  is  the  custom,  when  quoting  rates  for  francs, 
to  quote  the  number  of  francs  and  centimes  that  will 
be  allowed  per  $1,  as,  for  example,  5.155/8 — mean 
ing  that  for  each  $1  you  would  be  allowed  5  francs 
15  5/8  centimes. 

On  Germany  the  quotation  would  be  for  4  marks 
instead  of  1;  for  example,  95  5/16 — ^meaning  that  for 
each  4  marks  you  would  have  had  to  pay  95  5/16 
cents. 

The  allowance  of  5/8  of  a  centime  per  $1,  consider- 
ing that  one  whole  centime  is  worth  only  1-5  of  a 
cent  in  our  money,  and  a  fraction  Like  5-16  of  a  cent 


272  BANKING,  CREDIT  AND  FINANCE 

in  our  money  on  4  marks,  no  doubt  seems  to  most 
people  like  a  very  small  item,  but  on  a  transaction 
of  100,000  francs  (about  $19,400  in  our  money)  5/8 
of  a  centime  per  dollar  would  make  a  difference  of 
over  $28,  and  5-16  of  a  cent  per  4  marks  on  100,000 
marks  (normally  about  $24,800)  would  be  a  differ- 
ence of  over  $78,  or  over  $15  on  each  1-16  of  a  cent. 

§  309.    Peculiarity  of  French  Quotations. — One 

peculiarity  in  the  French  quotations  is  that  the  rate 
is  always  advanced  or  lowered  by  5/8  of  a  centime; 
for  illustration,  the  next  lower  rate  to  5.15  would 
be  5.155/8,  then  5.161/4,  6.167/8,  5.171/2,  etc.,  there 
being  just  5/8  between  each  quotation.  Bear  in  mind, 
the  greater  the  number  of  francs  and  centimes  al- 
lowed per  dollar,  the  lower  would  be  the  rate,  since, 
as  the  quotation  is  per  $1,  the  more  francs  you  would 
receive  for  your  money.  One  reason  assigned  for  this 
method  of  quoting  the  French  franc,  which  is  the  re- 
verse of  that  in  other  kinds  of  exchange,  is  5/8  of  a 
centime  is  equivalent  to  1/8  of  1  per  cent  in  the  pound 
sterling,  and  as  most  of  the  French  exchanges  was 
formerly  covered  or  paid  through  English  exchange, 
this  method  served  a  convenience  in  figuring.  The 
other  reason  is  that  as  there  were  5  francs  to  the  dol- 
lar, 1/8  of  1  per  cent  on  1  franc  would  call  for  5/8  of 
1  per  cent  on  5  francs,  the  equivalent  of  $1. 

But  these  quotations  on  francs  by  5/8  of  a  centime, 
though  they  served  every  purpose  a  few  years  ago, 
are  not  now  sufficiently  close  to  meet  the  competi- 
tion of  the  present  day  and  are  supplemented  with 
fractional  quotations,  such  as  5.15  5/8 — 1.32,  or 
5.15  5/8—1-16,  or  5.15  5/8  plus  1-32,  etc.  These  plus 
or  minus  fractions  do  not  apply  directly  to  the  rate. 


FOREIGN  EXCHANGE  273 

but  mean  1-32,  1-16,  3-32,  etc.,  of  1  per  cent  plus  or 
minus  the  equivalent  amount  in  American  money, 
which  is  added  or  deducted  as  the  case  may  be. 

§  310.  German  and  English  Quotations.— Quota- 
tions for  German  exchange,  where  quoted  for  4  marks 
instead  of  a  single  mark,  were  also  supplemented  by 
the  plus  or  minus  fractional  quotations;  as,  for  ex- 
ample, if  95  5/16  per  4  marks  was  thought  a  little  too 
high,  it  w^ould  be  quoted  95  5/16  minus  1-32  of  1  per 
cent,  which  on  a  transaction  of  100,000  marks  would 
make  a  difference  of  about  $7.50. 

In  large  transactions  the  quotations  on  English 
exchange  (which  are  generally  confined  to  eighths  of 
a  cent  per  pound)  are  often  supplemented  with  the 
quotation  **plus  1.00,"  which  means  $1  additional 
will  be  charged  on  each  1,000  pounds,  making  a  dif- 
ference of  10  points  in  the  rate.  That  is,  a  quotation 
of  4.87  1/4  plus  1.00  would  be  $4.8735,  and  it  is  not 
unusual  in  very  large  transactions  to  advance  or 
lower  the  rate  by  five  hundredths  of  a  cent  per  pound, 
such  as  4.87,  4''.8705,  4.8710,  4.8715,  etc.,  each  five 
hundredths  of  a  cent  per  pound  making  a  difference 
of  $5  on  each  10,000  pounds,  or  $250  on  a  transaction 
of  500,000  pounds  (nearly  $2,500,000  in  our  money), 
often  made  by  large  financial  institutions  in  a  single 
day. 

§  311.  Meaning  of  Newspaper  Quotations.— As 
an  illustration  let  us  take  a  clipping  from  the  Chi- 
cago Tribune,  quoting  the  rates  for  ''foreign  ex- 
change." Under  the  heading  "Foreign  Exchange 
Market"  it  starts  by  saying:  "Foreign  exchange 
closed  steady  at  the  following  rates."     "Steady" 


274  BANKING,  CREDIT  AND  FINANCE 

means  a  demand  and  prices  likely  to  remain  as  they 
are.  ''Firm"  would  mean  good  demand,  with  prices 
tending  upward;  "strong,"  a  large  demand,  with 
prices  certain  to  go  higher.  "Dull"  or  "weak" 
would,  of  course,  mean  very  little  or  no  demand,  with 
prices  tending  lower. 

Under  the  heading  of  "selling"  rates  we  w^ould 
find: 

Cable  transfers,  London 5.88 

Checks,  London 4.87  1/2 

Checks,  Paris 5.16  1/4  plus  1-32 

Checks,  Berlin 0.95  7-16 

Checks,  Holland  0.40  1/4 

"Selling  rates,"  in  this  case,  mean  the  prices  that 
were  charged  customers  who  wished  to  remit  abroad. 

The  first  item,  "cable  transfers,"  is  where  amount 
of  money  desired  to  be  paid  abroad  is  deposited  here, 
and  the  bank  or  concern  with  which  you  are  transact- 
ing the  business  cables  its  correspondent  abroad  to 
pay  the  amount  to  the  person  at  the  address  you 
designate.  Of  course,  it  would  be  necessary  for  those 
making  such  transfers  to  have  funds  or  credits 
abroad  for  such  purpose.  When  it  is  desired  to  have 
money  paid  at  interior  places,  the  cablegram  will  be 
sent  to  the  nearest  city  at  which  the  bank  or  concern 
here  has  funds,  and  it  will  be  forwarded  by  mail  there, 
causing  a  delay  of  perhaps  only  a  few  hours.  Ordi- 
narily, within  one  or  two  hours  from  the  time  you 
deposit  the  money  here  it  will  be  paid  to  the  person 
abroad  whom  you  designate. 

The  quotations  for  checks  London,  checks  Paris, 
.  and  checks  Berlin  are  the  rates  at  which  they  would 


FOREIGN  EXCHANGE  275 

have  sold  you  a  demand  check  or  draft  payable  at 
those  particular  cities.  If  you  wanted  a  check  pay- 
able at  some  other  point  in  Great  Britain,  France,  or 
Germany,  they  undoubtedly  would  have  charged  y<ju 
a  higher  rate,  since  their  balances  are  kept  only  at 
principal  trade  centers,  and  their  arrangements  for 
payment  of  their  paper  at  interior  or  other  points 
are  that  the  bank  coiTespondents  there  will  honor 
their  paper  and  reimburse  themselves  by  drawing 
upon  the  trade  centers  for  the  amount  plus  th^ir 
commission  for  cashing,  hence  adding  to  the  cost  of 
performing  the  service. 

The  next  item  is  *' checks  Holland  40  1/4."  This 
means  they  would  charge  for  a  check  or  draft  on 
any  point  in  Holland  at  the  rate  of  40  1/4  cents  per 
gulden  or  guilder,  the  money  of  that  country. 

Following  the  above  there  would  appear  in  our 
newspaper  clipping  the  heading  ** Buying  Rates,"' 
w^hich  mean  the  rates  at  which  the  banks  purchased 
the  various  classes  of  commercial  paper  named.  The 
quotations  were  as  follows : 

60  days  London  bankers 4.84  1/4 

60  days  London  documentary 4.84  1/2 

3  days  Antwerp  1...5.18  1/8  less  1-32 

3  days  Hamburg 0.95  1/4  plus  1-32 

60  days  Holland 0.39  15/16 

The  first  quotation,  ''60  days  London  Bankers 
4.841/4.''  was  for  drafts  drawn  by  bankers  payable 
sixty  days  after  sight  (meaning  after  acceptance 
abroad)  against  their  account  in  a  bank  upon  which 
draft  is  drawn.  The  banker  issuing  such  draft  has 
60  days  (if  necessary)  in  which  to  place  funds  abroad 


276  BANKING,  CREDIT  AND  FINANCE 

to  meet  paj^ment  of  this  draft;  therefore  a  bank  will 
often  sell  its  sixty-day  draft  with  the  belief  that  it 
will  be  able  to  purchase  and  place  the  amount  abroad 
to  meet  the  same  before  draft  is  due,  at  a  lower 
rate  than  at  which  it  sold,  and  thus  make  a  profit. 
There  are  other  cases  where  a  bank  will  sell  its  sixty- 
day  draft  on  the  market  to  obtain  the  use  of  the 
money  for  that  period. 

The  next  item,  ''60  days  London  documentary 
4.84  1/2"  is  what  is  known  as  a  foreign  commercial 
bill  of  exchange,  which  is  explained  more  fully  later. 
The  documents  referred  to  are  the  bills  of  lading  and 
the  insurance  certificates,  representing  a  shipment 
of  goods  abroad.  The  draft  is  drawn  payable  sixty 
days  after  sight,  which  is  the  time  credit  extended  to 
purchaser  by  the  seller. 

The  three-day  quotation  mentioned  on  Antwerp 
and  Hamburg  are  for  drafts  payable  three  days  after 
sight.  The  custom  of  drawing  drafts  three  days  after 
sight  on  points  in  European  countries  outside  of 
Great  Britain  is  because  no  days  of  grace  are  allowed 
on  the  continent  as  in  Great  Britain,  and  the  three 
days  are  granted  to  insure  payment  being  made,  and 
thus  avoid  ''protest  fees,"  which  often  are  very 
exorbitant. 

The  sixty-day  Holland  bills  are  issued  and  paid 
under  practically  the  same  conditions  as  the  "sixty- 
day  London  bankers"  just  mentioned,  although 
drawn  against  commodities  exported.  They  are  what 
is  termed  "clean  bills"  by  reason  of  there  being  no 
documents  attached. 

We  might  also  find  in  our  paper  the  following  items 
which  pertain   to   foreign   exchange   transactions: 


FOREIGN  EXCHANGE  277 

Under  the  head  of  "Money  Markets  of  the  World" 
it  reads:  "Discounts  at  London,  2  3/4  per  cent;  Paris, 
2  7-16  per  cent;  Berlin,  15/8  per  cent."  Foreign 
discount  rates  mean  the  rate  per  cent  charged  or  al- 
lowed on  drafts  discounted  or  paid  before  due.  These 
particular  rates  mentioned  apply  to  drafts  drawn  on 
bankers. 

Here  is  also  another  former  newspaper  quotation 
"Sterling  exchange — posted  rates  4.88,  actual  rates 
487. 1/4,  documentary  rates  4.84."  Posted,  or  nominal, 
rates  are  those  posted  daily  on  bulletins  of  leading 
New  York  dealers  in  exchange  for  use  of  the  general 
public,  and  apply  more  particularly  to  smaller  siuns. 
Actual  rates  are  inside  terms  made  to  brokers  or 
large  buyers  for  large  sums.  Documentary  rates  are 
for  commercial  bills  of  exchange. 

§  312.  Before  and  After  Clearings. — Here  is  still 
another  newspaper  quotation,  which  while  not  apply- 
ing directly  to  foreign  exchange,  materially  affects  its 
rates  in  the  western  market:  "New  York  exchange 
— 30  cents  discount  before  clearings,  40  cents  dis- 
count after  clearings."  The  expressions  "before" 
and  "after  clearings"  mean  before  or  after  the  meet- 
ing of  the  bank  clearing-house,  a  meeting  held  each 
day  about  11  a.  m.  by  representatives  of  the  differ- 
ent banks  to  exchange  debits  and  credits  with  each 
other.  * '  New  York  exchange ' '  means  checks  payable 
by  a  bank  in  New  York.  Thirty  cents  discount  in 
this  case  would  mean  that  New  York  exchange,  in 
sales  between  banks  (not  as  a  rule  with  the  public), 
would  be  sold  at  a  discount  of  30  cents  for  each  $1,000. 
If  New  York  exchange  w^ere  quoted  at  a  premium 
of  30  cents,  they  would  charge  30  cents  additional 


278  BANKING,  CREDIT  AND  FINANCE 

per  $1,000.  The  reason  why  the  rates  for  New  York 
exchanges  affect  the  rates  for  foreign  exchange  in 
the  West  is  that  the  rates  in  the  West  and  elsewhere 
in  the  United  States  are  based  on — or  controlled  by — 
the  rates  in  New  York,  because  N-ew  York  is  the 
principal  buying  market.  Therefore  if  New  York 
exchange  here  is  at  a  discount,  on  large  transactions 
banks  would  sell  you  a  draft  on  London  or  other 
foreign  city  at  the  rate  of  30  cents  per  $1,000,  less  than 
you  could  buy  it  for  in  New  York ;  or,  if  at  a  premium, 
the  rates  would  be  that  much  per  $1,000  higher  than 
New  York  providing  of  course  vou  paid  in  cash  or 
local  funds. 


Questions  for  Review,  Chapter  XIII. 

1.  What  developments  of  modern  business  caused  the 
establishment  of  foreign  departments  in  large  commercial 
piouses  ? 

2.  Is  there  any  special  demand  for  young  men  with  a 
knowledge  of  foreign  exchange  and  foreign  shipping? 

3.  What  is  a  good  definition  of  foreign  exchange? 

4.  Why  is  the  system  of  exchanging  debts  through  the 
medium  of  commercial  paper  adopted  ? 

5.  What  items  are  charged  up  to  the  United  States  as  an 
offset  amount,  if  balance  of  foreign  trade  is  in  its  favor? 

6.  Why  is  a  knowledge  of  the  monetary  system  of  for- 
eign countries  desirable  for  a  young  business  man? 

7.  Is  paper  money  ever  accepted  for  its  full  face  value 
outside  of  the  country  from  which  it  emanates? 

8.  Is  it  ever  legal  tender  in  foreign  countries  ? 

9.  What  is  the  only  international  money,  and  why? 

10.    What  is  meant  by  the  "fineness"  of  gold  or  silver 
coins  ? 


FOREIGN  EXCHANGE  279 

11.  What  determines  the  value  or  price  of  the  gold  money 
of  account  in  commercial  countries? 

12.  Is  the  price  of  gold  affected  by  either  an  absence  or  a 
scarcity  of  the  supply? 

13.  How  are  gold  shipments  between  the  United  States 
and  Europe  handled? 

14.  What  is  the  "fineness"  of  commercial  bars  of  gold? 

15.  What  is  meant  by  "money  of  account"? 

16.  What  five  countries  are  now  comprised  in  the  Latin 
Union? 

17.  What  is  the  normal  value  of  the  English  sovereign  in 
American  money? 

18.  What  is  meant  by  sterling  exchange? 

19.  What  is  the  meaning  of  the  term  "rate  of  exchange"  ? 

20.  What  is  the  diflference  between  "direct"  and  "arbi- 
trated" exchange? 

21.  What  causes  contribute  to  the  fluctuations  in  the 
price  of  exchange? 

22.  How  can  the  par  of  exchange  between  any  two  coun- 
tries be  determined? 

23.  What  is  the  commercial  par  of  exchange? 

24.  Give  a  simple  illustration  of  the  commercial  par  of 
exchange. 


CHAPTER  XIV. 

Foreign  Exchange 

(Continued) 

Section  313.    Commercial  Bills  of  Exchange. — The 

basis  of  a  foreign  bill  of  exchange  is,  as  its  name 
implies,  a  commercial  transaction  of  international 
character,  which  consists  in  the  purchase  of  goods 
or  commodities  in  one  country  for  export  to  another 
country. 

The  draft  represents  the  money  value  of  the  goods 
which  is  due  the  exporter. 

The  bill  of  lading  is  the  contract  between  the 
transportation  company  and  the  shipper  for  carry- 
ing of  the  goods,  and  also  serves  as  the  order  for  their 
delivery. 

The  insurance  certificate  is  the  certification  of  the 
marine  insurance  company  of  reimbursement  in  case 
goods  are  lost  by  fire  or  accident  while  en  route  on 
the  ocean. 

These  three  documents — the  draft,  bill  of  lading, 
and  insurance  certificate — constitute  what  is  termed 
a  ''foreign  commercial  bill  of  exchange."  They  are 
almost  invariably  issued  in  duplicate  for  fear  one  set 
may  be  lost  in  its  transmission  abroad  by  mail,  one 

280 


FOREIGN  EXCHANGE  281 

of  each  set  being  marked  '* original/'  the  other  "du- 
plicate;" or  sometimes  one  of  the  drafts  will  read 
"first  of  exchange/'  the  other  "second  of  exchange." 

Foreign  commercial  bills  of  exchange  are  also 
known  as  "documentary  bills  of  exchange,"  by 
reason  of  the  bill  of  lading  and  insurance  certificate 
accompanying  the  draft.  It  is  customary  to  send  the 
original  of  the  three  documents  by  first  steamers,  the 
duplicates  or  seconds  by  following  steamer.  If  the 
original  set  is  lost,  duplicate  wiU  serve  same  purpose. 

§  314.  Commerce  and  Exchange. — Trade  between 
countries  may  be  said  to  be  conducted  in  a  manner 
somewhat  similar  to  that  employed  here  between 
cities  or  towns,  except  that  the  method  of  payment 
or  reimbursement  to  the  shipper  necessarily  differs 
by  reason  of  greater  distance,  the  difference  in  kind 
of  money  used,  and  commercial  customs  in  the  two 
countries.  To  obtain  payment  for  goods  shipped  to 
a  foreign  country  which  perhaps  w^ould  not  arrive  at 
their  destination  for  several  weeks  and  possibly 
months,  according  to  distance,  and  whether  by  fast 
or  slow  steamer,  to  say  nothing  of  the  fact  that  to 
some  countries  steamers  only  leave  our  ports  semi- 
monthly or  monthly,  it  is  the  usual  custom  of  the 
shipper,  whom  we  term  the  exporter,  to  sell  his  com- 
mercial bill  of  exchange  against  the  shipment  in  ad- 
vance to  the  highest  bidder;  and  he  rarely  experi- 
ences any  difficulty  in  finding  a  ready  purchaser. 

Our  exporters,  in  competing  with  foreign  manu- 
facturers, must  take  into  consideration  cost  of  trans- 
portation, insurance  on  goods,  customs  duties,  dif- 
ference in  value  of  money,  and  the  probable  price 


282  BANKING,  CREDIT  AND  FINANCE 

at  wMch  they  can  discount  or  sell  their  commercial 
bills  against  the  same.  Time  credit  must  also  be 
extended  to  the  buyer.  If  our  exporters  had  to  wait 
for  payment  until  the  maturity  of  their  bills,  it  would 
mean  the  tying  up  of  a  large  amount  of  capital  and 
possibly  prevent  their  competing  successfully, 

§  315.  A  Typical  Transaction. — The  process  by 
which  a  foreign  commercial  bill  of  exchange  drawn 
against  commodities  exported  is  created  and  handled, 
and  reaches  its  termination,  may  best  be  illustrated 
by  an  actual  transaction,  and  we  give  below  exact 
terms  of  a  commercial  bill  of  exchange  drawn  against 
a  shipment  of  flour  made  by  a  leading  exporter — 
flour  being  one  of  our  chief  exportable  commodities. 

The  shipment  of  flour  in  question,  destined  to  Liver- 
pool, England,  was  delivered  to  the  Soo  freight  line 
at  Minneapolis,  operating  over  the  Minneapolis,  St. 
Paul  &  Sault  Ste.  Marie  and  Canadian  Pacific  Rail- 
roads, and  a  through  bill  of  lading  in  duplicate  was 
obtained.  This  through  bill  of  lading  is  a  foiin  of 
contract,  issued  by  special  arrangements  with  con- 
necting ocean  steamship  lines,  by  the  terms  of  which 
it  is  agreed,  under  conditions  printed  thereon,  to 
transport  the  shipment  through  to  the  destination  at 
the  foreign  port  (Liverpool).  It  states  the  number 
of  packages,  how  they  are  marked,  their  contents,  the 
particular  grade  or  brand  of  flour,  and  the  name  and 
location  of  the  party  for  whom  the  goods  are  in- 
tended. It  is  negotiable  only  by  indorsement  of  the 
exporter. 

Upon  presentation  of  this  evidence  of  shipment,  a 
marine  insurance  company  has  issued  a  certificate 


FOREIGN  EXCHANGE  283 

of  insurance,  under  the  terms  of  which  it  agrees  to 
reimburse  the  owner  of  the  goods  in  case  of  the  loss 
of  the  shipment  by  fire  or  accident  while  en  route  on 
the  ocean.  This  shipment,  as  is  the  usual  custom,  is 
insured  for  about  10  per  cent  in  excess  of  its  billed 
value. 

The  exporter  then  attaches  to  these  documents  a 
draft  for  the  amount  for  which  the  flour  was  sold, 
namely,  £457  12s  lOd.  Had  his  shipment  been  des- 
tined to  a  point  in  Germany,  the  draft  would  have 
been  drawn  in  marks ;  if  to  France,  in  francs,  and  so 
on;  usually  in  the  money  of  the  country  where  it  is 
going;  but  quite  often  it  will  be  drawn  in  English 
money,  although  going  to  some  other  country,  by 
reason  of  English  exchange  being  preferred. 

In  this  case  the  exporter  agreed  to  allow  the  buyer 
sixty  day's  time  in  w^hich  to  pay  the  draft,  after  its 
presentation.  The  draft  reads  "60  days  after  sight 
of  this  first  of  exchange  (second  unpaid),  pay  to  the 
order  of  ourselves  457  pounds  12  shillings  and  10 
pence,  against  Soo  line,  through  B.  L.  No.  B.  1548, 

dated ,  19 ,  for  2,000  sacks  of  flour  branded 

Dakota,"  and  is  signed  ''Northwest  Consolidated 
Milling  Co.,  H.  E.  Kent,  cashier, '^  who  are  termed 
the  drawers.  In  the  left  comer  it  reads :  ' '  To  James 
Corwith  &  Co.,  Liverpool,  Eng. ''  They  are  the  buyers, 
or  as  we  term  them,  the  drawees. 

Now,  these  three  documents,  drawn  to  the  order 
of  the  exporters  (Northwestern  Consolidated  Milling 
Co.),  comprise  a  conunercial  bill  of  exchange. 

Upon  the  same  day  that  these  documents  wer<^ 
issued,  and  practically  before  the  flour  had  started 


284  BANKING,  CREDIT  AND  FINANCE 

on  its  long  journey,  the  exporters  offered  this  bill  of 
exchange  for  sale.  It  was  sold  to  the  Security  Bank 
of  Minneapolis  (that  being  highest  bidder)  at  the 
rate  of  $4.84  per  pound,  who  in  turn  resold  it  to  the 
American  Express  Co.  at  $4.84  1/8  per  pound.  The 
indorsement  on  the  back  of  the  draft  showed  the 
papers  to  have  been  sent  to  Liverpool  for  collec- 
tion. The  bank  at  Liverpool  notified  Corwith  & 
Co.  to  call  and  '* accept"  the  draft,  which  they  did, 
by  writing  the  word  '* accepted"  and  the  date  over 
their  signature. 

About  fifteen  days  afterward  the  flour  arrived  by 
slow  steamer,  and,  being  in  immediate  need  of  it, 
Corwith  &  Co.,  in  order  to  obtain  the  bill  of  lading, 
had  to  pay  the  draft;  the  instructions  stamped  on 
same  being;  "Surrender  documents  upon  payment 
only." 

Now,  as  Corwith  &  Co.  paid  this  draft  forty-five 
days  before  it  was  due,  the  bank,  as  is  customary 
allowed  them  the  prevailing  rate  of  discount  appli- 
cable to  that  class  of  bills,  which  was  2  per  cent  (or 
£1  3s.  5d.)  The  difference,  £456  7s.  5d.,  less  cost  of 
revenue  stamps,  was  placed  to  the  credit  of  the 
American  Express  Co.  by  the  bank  which  closed  the 
transaction. 

Had  the  instructions  on  draft  read  "Surrender 
documents  upon  acceptance  of  di^aft,"  the  bill  of 
lading  would  have  been  delivered  when  draft  was 
accepted,  thus  enabling  CorAvith  &  Co.  to  obtain 
goods  at  once  and  pay  draft  sixty  days  afterward  if 
they  desired. 

The  method  used  in  determining  what  this  commer- 


FOREIGN  EXCHANGE  285 

cial  bill  was  worth  when  buying  it  here  was  based 
upon  the  following: 

(a)  What  demand  exchange  upon  Liverpool 
could  be  sold  for. 

(b)  The  cost  of  revenue  stamps  to  be  affixed 
when  draft  was  accepted  abroad. 

(c)  The  interest  for  the  number  of  days  for 
which  draft  was  drawn,  plus  three  day's  grace,  at  the 
rate  per  cent  bill  could  be  discounted. 

For  illustration: 

$4.8775    Demand  rate  on  Liverpool. 
0.00244  Cost  of  revenue  stamp  (1-20  of  1  per  cent,  of  rate 
or  1  shilling  per  100  pounds). 
$4.87506 

0.01676  Interest  63  days  2  per  cent  (disc,  rate) . 
$4.85830  Parity  or  cost  per  pound  at  maturity  or  if  dis- 
counted. 
4.84125  Rate  per  pound  at  which  purchased. 
$0.01705  Profit  per  pound. 

Or  $7.78  on  £457  12s.  lOd. 

§  316.    Foundation  of  Foreign  Exchange.— The 

buying  of  foreign  commercial  bills  of  exchange  is 
the  principal  medium  of  bankers  and  foreign-ex- 
change dealers  in  placing  funds  to  their  credit  in 
banks  abroad  against  which  they  issue  checks,  drafts, 
letters  of  credit,  etc.  It  is  the  foundation  of  most  of 
our  foreign-exchange  transactions.  It  is  the  prin- 
cipal source  of  profit  in  the  business.  It  enables 
manufacturers  to  sell  their  goods  abroad  for  cash  in 
advance. 

Foreign  bills  of  exchange  vary  as  to  conditions  of 
payments  abroad.  If  conditions  of  sale  between 
buyer  and  seller  of  the  goods  were  that  goods  were  to 


>> 


286  BANKING,  CREDIT  AND  FINANCE 

be  paid  for  upon  delivery,  the  instructions  aceom 
panying  bill  would  say  "documents  for  payment 
(expressed  d.  p.),  meaning  not  to  deliver  the  bill  of 
lading  (which  would  enable  drawee  to  get  goods) 
until  draft  had  been  paid. 

If  instructions  said  ''documents  for  acceptance" 
(expressed  d.  a.),  it  would  mean  that  bill  of  lading 
could  be  delivered  when  draft  was  accepted,  thus 
enabling  drawee  to  obtain  goods  at  once  and  pay 
draft  any  time  within  sixty-three  days  (if  a  sixty- 
day  bill). 

§  317.  Buying  Commercial  Bills. — The  buying  of 
commercial  bills  of  exchange  can  be  safely  under- 
taken only  by  those  thoroughly  familiar  with  that 
business.  It  is  practically  equivalent  to  loaning 
money  upon  security  you  have  not  seen.  If  the 
drawee  of  the  bill  has  unquestionable  responsibility, 
that  of  course  eliminates  the  principal  risk  of  loss; 
but  if  great  care  is  not  exercised  in  examining  bills 
purchased,  a  slight  imperfection  or  error  might  cause 
a  long  delay  in  adjusting  the  error,  thereby  causing 
loss  of  interest.  If  through  a  misunderstanding  or 
for  other  cause  goods  are  not  accepted,  they  have  to 
be  sold  to  the  best  advantage  for  the  account  of  the 
owner  of  the  bill,  and  the  proceeds  of  the  sale  are 
applied  toward  payment  of  the  draft.  If  there  is  a 
deficiency,  it  is  collected  of  the  drawer  of  the  biU— 
the  exporter. 

The  buyer  of  commercial  bills  should  knoT«  the 
aiarket  value  of  the  goods  exported  and  the  financial 
standing  of  the  drawer  or  exporter;  should  see  that 
the  bill  of  lading  is  correctly  dated,  corresponds  with 
the  shipment  made,  is  duly  signed  by  the  agent  or 


FOREIGN  EXCHANGE  287 

proper  official  of  the  railway  or  freight  line ;  that  it 
corresponds  with  the  insurance  certificate  in  the 
various  particulars;  that  if  more  than  two  copies  were 
issued,  he  has  them  all;  that  there  are  no  printed  or 
stamped  conditions  thereon  that  would  be  likely  to 
render  it  valueless  under  possible  emergencies.  If 
goods  are  perishable,  see  that  they  are  routed  by  fast 
freight  and  fast  steamers.  If  bill  of  lading  only 
covers  shipment  to  the  seaport,  as  is  sometimes  the 
case  when  shipped  from  small  inland  places  where 
through  bills  of  lading  are  unobtainable,  an-ange- 
ments  must  be  made  through  your  owti  agent  to  have 
same  exchanged  for  ocean  bill  of  lading  at  seaport. 
Any  error  or  incompleteness  of  the  documents  will 
cause  a  delay  in  pajrment  or  expenses  for  cablegrams 
to  adjust  them. 

§  318.  Hypothecation  Certificates. — It  is  the  cus- 
tom of  buyers  of  foreign  commercial  bills  of  ex- 
change to  exact  of  exporters  what  is  tenned  a  "hy- 
pothecation certificate.^'  This  certificate,  after 
describing  the  nature  of  the  shipment  and  the  docu- 
ments in  question,  states  in  effect  that  the  bill  of 
lading  is  lodged  as  collateral  security  for  the  accept- 
ance and  payment  of  the  draft;  that  in  case  the 
drawee  declines  to  accept  the  draft,  or  it  is  not  paid 
at  maturity,  the  owner  of  the  bill  is  authorized  to 
place  the  property  described  in  the  hands  of  brokers 
for  sale  for  account  of  whom  it  may  concern,  and 
apply  the  proceeds  toward  payment  of  the  di*aft 
and  expenses  incurred;  and  that  in  case  of  a  defi- 
ciency the  seller  agTces  to  pay  amount  on  demand. 
Sometimes  exporters  give  a  general  hypothecation 


^8  BANKING,  CREDIT  AND  FINANCE 

certificate  to  apply  to  any  and  all  bills  of  exchange 
purchased  of  them. 

§  319.  Certificates  of  Insurance,  Etc. — Certificates 
of  insurance  on  shipments  exported  are  usually  for 
a  sum  of  from  10  to  20  per  cent  in  excess  of  the  stated 
value  of  the  goods.  They  should  be  carefully  ex- 
amined to  see  that  there  is  no  clause  which  would 
render  insurance  void  in  event  of  the  shipment  not 
going  forward  at  a  specified  period,  or  that  it  w^ould 
expire  before  arriving  time  of  the  goods  in  case  of 
delay  or  by  reason  of  any  of  the  possible  emergencies 
likely  to  arise. 

The  buyer  of  foreign  commercial  bills  of  exchange 
must  be  familiar  with  the  revenue  laws  and  com- 
mercial customs  of  all  the  foreign  countries,  as  well 
as  the  various  rates  of  discount  upon  the  several 
classes  of  paper  as  they  change  from  day  to  day. 

§  320.  Various  Rates  of  Discount. — ^You  should 
always  bear  in  mind  that  a  different  rate  for  discount 
applies  to  the  different  classes  of  bills.  For  instance, 
on  documentary  bills  where  documents  are  for  pay- 
ment, the  discount  or  rebate  rate  is  1  per  cent  below 
the  bank  of  England  official  minimum  discount  rate. 
If  drawn  on  firms  (not  bankers)  and  documents  are 
for  acceptance,  the  discount  rate  would  be  1/4  or  1 
per  cent  above  the  private  discount  rate  for  bankers' 
bills. 

If  drawn  on  bankers,  whether  documentary  or 
otherwise  (which  are  always  for  acceptance),  the 
discount  rate  would  be  the  private  rate  of  discount, 
which  fluctuates  according  to  demand  and  supply  of 
such  bills;  and  in  case  of  large  transactions  it  is 


FOREIGN  EXCHANGE  289 

customary  for  buyers  of  such  bills  here  to  cable  their 
correspondents  abroad  for  a  discount  rate  to  apply 
on  bills  to  arrive  by  next  mail  or  for  a  stipulated 
period  before  buying,  in  order  that  they  may  know- 
exactly  at  what  rate  the  bills  can  be  discounted  upon 
their  arrival.  Without  such  previous  arrangement 
the  discount  rate  might  change  materially  and  re- 
sult in  loss  upon  the  transaction. 

§  321.  The  Bank  of  England  Rate.— The  Bank  of 
England  official  minimum  discount  rate  is  fixed  by 
the  directors  of  the  Bank  of  England  at  their  meet- 
ings upon  Thursday  of  each  week,  and  their  decision 
usually  appears  in  the  financial  columns  of  our  daily 
papers  reading  thus:  "Bank  of  England  minimum 
discount  rate  unchanged,"  or  "the  Bank  of  England 
increased  (or  reduced)  its  minimum  discount  rate 
to  3  per  cent,"  etc. 

The  private  discount  rate  is  the  rate  at  which  pri- 
vate banks  (meaning  all  those  in  Great  Britain  other 
than  the  Bank  of  England)  will  discount  bills  of 
exchange  for  account  of  the  owners  or  last  indorsers, 
and  this  discoiuit  is  governed  by  the  Bank  of  Eng- 
land discount  rate,  and  also  by  the  supply  of  bills  in 
the  market  for  discount,  but,  except  under  unusual 
conditions,  the  private  discount  rate  will  always  be 
about  1/4  of  1  per  cent  below  the  Bank  of  England 
official  minimum  discount  rate. 

What  are  known  as  "rebate  rates"  apply  only  to 
time  commercial  bills  of  exchange  drawn  on  firms 
where  documents  are  for  payment;  that  is,  where 
bill  of  lading  is  delivered  only  upon  payment  of  the 
draft.  This  rebate  is  an  allowance  made  to  the  payee 
or  drawee  from  the  face  amount  of  the  draft,  if  paid 


290  BANKING,  CREDIT  AND  FINANCE 

before  maturity,  or  before  due,  and  such  rebate  is 
1  per  cent  below  the  Bank  of  England  official  min- 
imum discount  rate. 

Theoretically  the  Bank  of  England  controls  the 
discount  market  in  London.  This  control  is  sought 
to  be  maintained  through  the  official  rate  of  discount 
at  the  bank,  which  is  advanced  when  its  stock  of 
gold  bullion  is  being  largely  drawn  upon  for  export 
to  the  United  States  or  European  countries.  If  the 
conditions  prevail  to  make  it  inadvisable  to  raise  the 
bank  rate,  a  higher  price  for  gold  will  be  charged;  or 
if  it  finds  difficulty  in  controlling  the  discount  rate, 
it  will  create  a  demand  for  discounts  by  borrowing 
on  its  security,  thereby  increasing  the  demand  for 
discounts. 

Unlike  the  Bank  of  England,  w^hich  undertakes 
to  control  the  stock  of  gold  by  advancing  the  dis- 
count rates,  the  Bank  of  France  protects  its  stock 
of  gold  by  increasing  the  price  of  gold  when  with- 
drawal of  a  large  amount  is  threatened.  The  official 
discount  rate,  rarely  changes  except  in  case  of  finan- 
cial or  political  crises. 

§  322.  Safe  and  Unsafe  Bills. — There  are  certain 
classes  of  commercial  bills  Avhich,  unless  special  care 
is  taken,  are  regarded  as  unsafe.  In  the  case  of 
cotton,  on  account  of  the  different  grades  and  the  fact 
that  there  is  so  great  a  difference  in  the  price  of  the 
different  grades,  and  its  being  so  easy  to  substitute 
one  grade  for  another,  the  bills  against  shipments 
should  be  purchased  only  of  w^ell-known  and  re- 
sponsible shippers  or  indorsers. 

Grain  shipments  are  all  right,  providing  the  grain 


FOREIGN  EXCHANGE  291 

inspector  at  the  shipping  point  is  of  good  reputation; 
otherwise  he  might  inspect  as  No.  2  what  was  billed 
as  No.  1. 

Perishable  goods  are  always  more  or  less  risky, 
on  account  of  the  danger  of  delay  and  of  the  goods 
spoiling.  You  should  see  that  perishable  goods  are 
sent  by  fast  freight  lines  and  fast  steamers. 

Pianos,  organs,  musical  instruments,  and  such 
goods  have  imaginary  value,  and  could  rarely  be 
sold  at  the  price  at  which  billed. 

"Banker's  reimburse  bills''  are  those  where  drafts 
are  drawn  against  a  shipment  exported,  upon  a  bank- 
er, the  documents  being  for  acceptance.  When  buy- 
ing such  bills  you  should  keep  a  record  showing- 
names  of  indorsers  and  keep  close  watch  of  the  draw- 
er or  shipper  until  the  bill  is  paid.  The  shipper 
should  be  responsible,  and,  if  buying  a  considerable 
amount  of  such  bills  on  the  same  drawee,  you  should 
ascertain  through  your  correspondent  abroad  the  re- 
sponsibility of  the  drawee,  and  be  sure  you  do  not  buy 
more  bills  against  a  single  drawee  than  his  ordinary 
business  requirements  would  indicate  he  needed. 

Banks  selling  commercial  bills  of  exchange  (docu- 
mentary) sometimes  stamp  them,  for  example,  "In 
case  of  need  with  the  Bank  of  Scotland,  London," 
or  some  other  banl^.  This  is  done  to  avoid  charge  of 
intermediate  banks  for  indorsing  or  protesting  drafts, 
which  charge  is  usually  very  exorbitant.  When  so 
stamped,  it  is  a  notice  to  all  holders  of  the  draft  they 
may  call  upon  the  bank  named,  if  the  draft  is  not 
promptly  accepted  or  honored,  for  relief;  therefore 
there  is  no  necessity  for  protesting.  The  bank  men- 
tioned will,  by  previous  aiTangement,  always  honor 


292  BANKING,  CREDIT  AND  FINANCE 

such  drafts  and  charge  to  the  account  of  the  bank 
indorsing  such  notation  thereon. 

§  323.  Clean  Bills  of  Exchange.— ''Clean  bills" 
uf  exchange  are  those  having  no  bill  of  lading  at- 
tached, iilthough  they  may  have  attached  insurance 
certificate  and  an  invoice  of  shipment.  If  these  clean 
bills  are  drawn  upon  firms,  they  are  subject  to  a 
discount  rate  of  1/4  of  1  per  cent  above  the  private 
discount  rate  of  the  day;  but  if  drawn  upon  bankers, 
they  will  be  discounted  at  the  private  discount  rate. 

Commercial  bills  of  exchange  drawn  by  exporters 
without  documents  are  generally  upon  their  own 
house  or  branch  abroad,  and  are  against  funds  which 
have  accumulated  to  their  credit  from  payments  for 
shipments  previously  made.  Exporters  before  sell- 
ing their  own  bills  of  this  kind  usually  wait  until  the 
rates  for  exchange  here  are  high.  Such  bills  are 
discoimta.ble. 

Commercial  bills  of  exchange  drawn  upon  bankers 
are  always  for  acceptance,  unless  otherwise  specified, 
and  the  discount  rate  applying  to  such  bills  is  the 
private  discount  rate  of  the  day. 

§  324.  Documentary  Bills. — Documentary  com- 
mercial bills  of  exchange  drawn  upon  firms  or  banks 
where  documents  are  for  payment  cannot  be  dis- 
counted upon  the  market,  as  in  the  case  of  such  bills 
where  documents  are  for  acceptance,  for  the  reason 
that  banks  abroad  to  which  bills  are  rent  for  collec- 
tion will  not  undertake  to  discount  commercial  bills 
unless  they  are  what  is  called  ** clean"  bills — that  is, 
those  having  no  documents  or  those  which  permit  the 


FOREIGN  EXCHANGE  293 

documents  to  be  delivered  when  the  draft  is  accepted 
by  the  drawee. 

A  documentary  or  commercial  bill  of  exchange, 
accompanied  by  instructions  from  the  exporter  or 
drawer,  to  deliver  documents  (bill  of  lading,  etc.) 
only  upon  payment  of  the  draft  by  the  importer  or 
di-awee,  which  are  drawn  upon  a  firm,  are  subject  to 
a  discount  rate  of  1  per  cent  below  the  Bank  of  Eng- 
land official  minimum  discount  rate.  If  the  instruc- 
tions are  to  deliver  documents  upon  acceptance  of  the 
draft,  the  same  rate  of  discount  by  the  holder  (bank) 
at  1/4  of  1  per  cent  above  the  private  discount  rate 
of  the  day. 

§  325.  Revenue  Stamps  on  Drafts.— Drafts  drawn 
in  the  United  States  payable  in  foreign  countries  are 
subject  to  the  revenue  laws  of  such  foreign  countries, 
and  the  cost  of  stamps  so  affixed  abroad  must  be 
paid  by  the  holder  of  the  bills,  who  in  turn  generally 
charge  to  the  bank  or  banker  from  whom  they  re- 
ceive the  same  for  collection.  The  amount  of  revenue 
stamps  varies  according  to  the  country,  and  in  most 
European  countries  has  been  largely  increased  since 
the  great  war. 

§  326.  Miscellaneous  Charges. — European  banlvs 
are  noted  for  charging  for  every  item  possible  in 
connection  with  every  transaction  handled — such 
items  as  postage  on  letters  sent  to  you  during  a  cer- 
tain period,  cost  of  cablegrams,  check-books,  envel- 
opes, stationery,  and  often  a  lump  sum  for  itcnLs  that 
may  have  been  overlooked.  For  collecting  com- 
mercial bills  of  exchange  they  will  usually  charge, 
in  England,  about  1-20  of  1  per  cent,  or  1  shilling  per 
cent;  France,  1-16  per  cent;  in  Germany,  1-20  per 


294  BANKING,  CREDIT  AND  FINANCE 

cent  in  the  larger  places  and  from  1-16  to  1/8  per 
cent  in  the  smaller  places. 

Interest  at  thirty,  sixty,  or  ninety  days,  with  three 
day's  grace  added  (as  allowed  throughout  Great  Brit- 
ain), can  easily  be  arrived  at  by  using  printed  tables 
furnished  by  some  of  the  leading  foreign  exchange 
bankers,  which  give  the  proper  decimal  of  a  pound 
to  deduct  for  interest  and  revenue  stamps  at  the 
various  rates.  These  printed  tables  also  give  the 
same  infomiation  for  figuring  German  and  French 
bills  of  exchange. 

§  327.  Complicated  Transactions. — ^Exchange 
transactions  become  more  complicated  when  one 
country  or  place,  as  is  often  the  case,  discharges  its 
debts  through  another  country  by  means  of  bills  of 
exchange  drawn  upon  a  third  country  or  place;  as 
for  instance,  a  merchant  in  Chicago  importing  goods 
from  China  would  pay  the  exporter  in  China  with  a 
check  upon  London,  for  the  reason  that  such  check 
would  be  more  desirable  to  the  shipper  in  China, 
since  the  demand  for  exchange  in  China  is  greater 
upon  London  than  upon  the  United  States. 

When  in  any  market  the  demand  for  exchange  on 
a  certain  country  or  place  is  greater  than  the  supply, 
the  deficiency  is  usually  supplemented  by  bills  on 
other  countries  having  a  more  favorable  exchange 
with  the  latter. 

In  the  East  Indies  those  who  ship  to  America 
usually  draw  upon  London  instead  of  America.  In 
New  Orleans,  exjwrters  of  cotton,  etc.,  to  Russia, 
draw  upon  London  instead  of  St.  Petersburg.  This  is 
because  England  does  more  business  with  those 


FOREIGN  EXCHANGE  295 

countries  than  America;  besides,  London  is  regarded 
as  the  greatest  money  center,  and  exchange  upon  that 
city  is  usually  more  favorable  and  can  be  used  to 
better  advantage. 

§  328.  German  Requirements.— Import ers  in  G  er- 
many  will  not  accept  drafts  drawn  against  importa- 
tions until  the  duplicate  documents  (duplicate  draft 
bill  of  lading,  etc.,)  are  presented,  and,  in  order  to 
have  the  original  draft  accepted  inmiediately  upon  its 
arrival,  banks  in  this  country  when  forwarding  such 
bills  for  acceptance  and  collection  will  attach  to  the 
original  draft  a  memorandum  agreement  to  the  ef- 
fect that  the  duplicate  bill  of  lading  is  in  their  posses- 
sion, and  their  correspondents  (banks)  are  requested 
to  guarantee  the  acceptors  (importers)  that  the 
duplicate  documents  will  be  delivered  to  them  as 
soon  as  received,  which  guarantee  also  gives  the  num- 
ber and  amount  of  draft,  the  name  of  drawer,  and  the 
signature  of  a  proper  official  of  the  bank  or  finan- 
cial institution  forwarding  the  same. 

§  329.  Convenience  of  Sterling  Exchange. — The 
volume  of  transactions  in  French,  German,  and  other 
continental  exchange  is  quite  small  compared  with 
that  of  sterling  exchange.  The  reason  for  this  is 
that  most  banks  have  accounts  or  balances  only  at 
London,  and  where  balances  are  kept  in  other  Euro- 
pean cities  they  are  usually  small  as  compared  with 
their  London  account.  Therefore,  in  making  remit- 
tances to  Paris,  Eerlin,  or  other  cities  on  the  con- 
tinent, it  is  most  generally  effected  by  transfemng 
the  funds  to  those  cities  from  London,  which  can 
generally  be  handled  very  satisfactorily,  by  reason 
of  most  large  European  banks  having  branches  in 


294  BANKING,  CREDIT  AND  FINANCE 

London.  It  is  customary,  however,  for  banks,  before 
transferring  funds  from  their  London  accounts,  to 
carefully  figure  out  the  difference  in  cost  between  a 
remittance  direct  from  here  to  the  city  where  it  is 
desired  to  place  the  funds  and  the  expense  of  trans- 
ferring it  from  London.  This  can  easily  be  deter- 
minded  by  ascertaining  the  rate  of  exchange  between 
London  and  the  point  referred  to. 

§•  330.  Precautions  Against  Wrong  Pasrment. — 
A  "crossed  sterling  check"  is  one  payable  either  to 
bearer  or  order,  having  the  name  of  a  banker,  or 
two  parallel  lines  and  the  abbreviation  *^&  Co.," 

written  or  printed  across  the  face,  thus:  " 

&  Co."  The  effect  is  to  direct  the  bank  upon  which 
it  is  drawn  to  pay  the  check  only  when  coming  to  it 
through  some  other  bank.  It  is  intended  as  an  ad- 
ditional safeguard  against  wrong  payment. 

In  most  foreign  countries  it  is  the  custom  of  bank- 
ers and  others  in  the  cashing  of  checks,  whether 
drawn  payable  to  order  or  bearer,  to  pay  to  the  per- 
son presenting  the  same,  and  under  the  laws  exist- 
ing in  these  countries  the  paying  bank  or  banker 
would  not  be  held  liable  for  wrong  payment.  As  a 
reason  for  this  seemingly  risky  method,  it  is  claimed 
that  on  account  of  the  very  severe  penalty  imposed 
for  forgery  under  their  laws,  the  requiring  of  strict 
personal  identification,  as  exacted  by  banks  in  the 
United  States,  is  found  unnecessary. 

As  an  additional  precaution  against  wrong  pay- 
ment, the  laws  of  Great  Britain  require  that  where  a 
check  is  crossed,  as  explained  above,  while  not  re- 
quiring personal  identification,  it  must  be  cashed 


FOREIGN  EXCHANGE  297 

through  some  bank  other  than  the  one  upon  whicli 
it  is  drawn. 

Notwithstanding  the  requirements  imder  the 
laws,  a  reasonable  amount  of  care  is  exercised  by 
banks  to  prevent  losses  by  incorrect  payment,  and 
in  some  countries  a  stranger  presenting  a  check 
drawn  to  his  order  is  required  to  make  affidavit  that 
he  is  the  person  named,  for  which  affidavit  the  pay- 
ing bank  exacts  a  small  fee. 


Questions  for  Review,  Chapter  XIV. 

1.  What  is  the  basis  of  a  foreign  bill  of  exchange? 

2.  What  three  documents  are  comprised  in  a  foreign 
commercial  bill  of  exchange? 

3.  What  is  the  nature  of  the  bill  of  lading? 

4.  How  are  documentary  bills  of  exchange  usually  sent 
abroad  ? 

5.  Does  the  duplicate  set  of  the  three  documents  serve 
the  same  purpose  if  the  original  set  is  lost? 

6.  What  is  the  usual  custom  of  exporters  with  regard 
to  the  disposal  of  commercial  bills  of  exchange? 

7.  What  is  meant  by  stamping  the  draft  "Surrender 
documents  upon  payment  only"  ? 

8.  What  is  the  foundation  of  most  of  our  foreign  ex- 
change transactions  and  the  principal  source  of  profit  in 
the  business? 

9.  What  is  the  advantage  to  manufacturers  of  the  foreign 
exchange  system? 

10.  What  information  should  be  obtained  before  com- 
mercial bills  are  bought? 

11.  What  are  hypothecation  certificates? 

12.  Does  the  same  rate  of  discount  apply  to  the  different 
classes  of  commercial  bills  ? 


298  BANKING,  CREDIT  AND  FINANCE 

13.  Who  fixes  the  Bank  of  England  discount  rate  and 
how  often  is  it  fixed? 

14.  What  is  the  "private  discount  rate"  in  England? 

15.  What  is  meant  by  "clean  bills"  of  exchange? 

16.  What  miscellaneous  charges  are  made  by  European 
banks  in  connection  with  foreign  exchange  transactions? 

17.  Why  is  sterling  exchange  most  convenient  in  the 
transaction  of  European  business? 


CHAPTER  XV. 

Capital  and  Its  Control 

Note. — This  chapter  is  devoted  to  a  discussion  of  capitalism  and 
state  control  of  capital,  by  Professor  William  Morse  Cole,  of  the  Grad- 
uate School  of  Business  Administration,  Harvard  University.  It  has 
been  indorsed  as  "an  excellent  refutation  of  the  fallacies  of  Com- 
munism" by  the  officials  of  many  large  financial  organizations,  including 
the  American  Short  Line  Railroad  Association  and  the  Metropolitan 
Life  Insurance  Company.  In  these  days  of  Bolshevism,  Sovietism,  and 
other  forms  of  Communistic  agitation  it  is  well  for  the  business  stu- 
dent to  have  a  clear  understanding  of  the  nature  and  functions  of 
caixital  and  its  true  relation  to  the  vi^ell-being  of  the  community. — Ed. 

Section  331.  Are  You  a  Capitalist? — Suppose  you 
are  a  savings-bank  depositor,  or  a  holder  of  an  insiu*- 
ance  policy.  That  means  that  you  have  saved  money. 
Did  saving  involve  a  sacrifice  ?  Did  you,  in  order  to 
save,  give  up  what  you  very  much  desired  and  even 
thought  you  had  a  right  to  buy  ?  Did  you  ever  give 
up  something  that  you  had  hoped  to  buy  for  those 
who  are  dear  to  you  in  order  that  you  might  save  the 
insurance  money,  or  make  a  savings-bank  deposit? 
Did  the  payment  on  a  Liberty  Loan  bond  or  an  in- 
surance premimn,  or  on  a  savings-bank  account,  ever 
come  hard?  If  so,  you  know  what  saving  means. 
If  you  have  lent  money  to  the  Government,  if  you 
have  placed  money  in  a  savings  bank,  if  you  have 
paid  premiums  on  a  life  insurance  policy,  you  are  a 
capitalist — not  a  make-believe  or  imaginary  capital- 
ist, but  an  actual  capitalist,  whose  capital  is  furnish- 
ing a  part  of  what  is  called  ** capitalism." 

299 


300  BANKING,  CREDIT  AND  FINANCE 

§  332.  What  Is  a  Capitalist?— You  know  that 
more  food  can  be  produced,  more  clothes  made,  more 
houses  built,  with  tools  and  machinery  and  the  means 
of  conveyance  like  wagons,  trucks,  and  railroads, 
than  without  these  assistances  for  labor.  These 
things  are  capital,  and  if  you  are  a  capitalist  you  own 
some  of  them.  Capital  is  nothing  but  the  product 
of  the  past  saved  and  devoted  to  the  assistance  and 
production  of  the  present  and  future.  You  know  very 
well  that  if  you  have  saved  a  hundred  dollars  out  of 
your  earnings  and  have  loaned  or  invested  that  sav- 
ing, you  have  never  had  the  satisfaction  of  spending 
that  money.  It  was  yours  to  use;  you  did  not  spend  it. 

If  the  earnings  that  you  have  saved  are  to  do  you 
any  good,  you  must  put  them  to  use;  and  you  have 
a  right  to  decide  whether  you  shall  now  spend  them 
and  get  the  satisfaction  you  previously  earned,  or 
shall  lend  to  someone  else  that  power  of  getting  satis- 
faction. If  you  choose  to  spend  them,  you  may  now 
enjoy  the  fruits  of  your  past  labor;  and  any  inter- 
ference with  that  right  is  robbing  you  of  your  wages, 
for  wages  that  may  not  be  spent  are  not  real  wages. 
If,  on  the  other  hand,  you  choose  not  to  spend  them 
but  to  lend  to  someone  else,  any  interference  wdth 
your  right  to  demand  the  return  of  them  by  the  bor- 
rower is  equally  robbing  you  of  your  wages. 

It  is  true  that  capital  is  the  product  of  labor — ^for 
no  capital  could  exist  unless  someone  consumed  less 
than  he  produced.  The  fact  that  the  capital  exists 
shows  that  the  labor  which  produced  it  has  not  con- 
sumed what  it  earned.  To  possess  such  unconsumed 
earnings  is  to  be  a  capitalist.    If  one  possesses  them 


CAPITAL  AND  ITS  CONTROL  301 

honestly,  one  is  an  honest  capitalist;  if  one  possesses 
them  dishonestly,  one  is  a  dishonest  capitalist. 

§  333.  Getting  Along  Without  Capital.— If  all  the 
capital  in  the  world  were  destroyed,  men  would  work 
only  with  their  bare  hands  upon  the  bare  soil.  Wliat 
they  would  produce  would  not  be  enough  to  feed, 
clothe  or  shelter  anything  like  a  tenth  of  the  world's 
population  today  on  the  average  scale  to  which  the 
w^orld  is  accustomed,  unless  we  were  contented  to 
live  with  few  of  the  comforts  and  conveniences  of 
food,  shelter,  and  clothing  that  we  now  have — to  say 
nothing  of  other  comforts.  Have  you  ever  tried  to 
do  any  important  work  without  tools  or  other  me- 
chanical assistance  ?  If  so,  you  know  a  little  of  what 
it  means  to  work  without  capital.  Suppose,  more- 
over, that  you  had  no  raw  material,  lumber,  iron  or 
cloth,  to  work  with.  How  much  could  you  have 
done? 

§  334.  Loans  to  the  Government  as  Capital. — 
What  has  become  of  what  you  have  saved?  If  you 
have  lent  your  money  to  the  United  States  govern- 
ment for  war  loans,  it  has  gone  into  ships,  into  food 
and  clothing  for  soldiers,  into  ammunition,  and  into 
many  other  things,  part  of  which  has  been  saved 
and  assists  in  producing  more  wealth  after  the  war, 
and  part  of  which  has  gone  into  the  attempt  to  stop 
the  ravages  of  those  people  who  believe  that  only 
'*might  makes  right."  It  was  because  we  had  cap- 
ital in  abundance  in  this  country,  capital  which 
might  be  devoted  to  the  production  of  war  necessities 
that  is  was  possible  for  us  to  oppose  the  Prussians 
who  were  attempting  to  establish  their  tyranny  over 


302  BANKING,  CREDIT  AND  FINANCE 

the  world  and  force  everyone  to  live  as  the  rulers  of 
Prussia  ordered. 

§  335.  Insurance  Premiums  as  Capital. — If  your 
money  has  gone  into  life  insurance,  a  large  part  of 
it  (all  that  has  not  yet  been  needed  for  the  payment 
of  death  claims,  maturing  endowments,  and  other 
payments  to  policy  holders  and  the  necessary  ex- 
penses), has  gone  into  a  reserve  fund,  which  is  grow- 
ing, ready  for  the  various  payments  to  policy  holders. 
That  fund  has  been  invested  by  insurance  companies 
as  an  important  part  of  the  capital  of  railroads, 
public  service  plants,  government  enterprises  like 
the  building  of  roads,  public  buildings,  farm  loans, 
dwelling  house  loans,  and  so  forth.  The  people  who 
borrow  the  money  pay  interest  to  the  insurance 
companies,  and  this  interest  makes  the  reserve  larg- 
er. So  the  insurance  premiums  that  you  have  to 
pay  are  very  much  smaller  than  would  be  necessary 
if  your  money  were  not  earning  interest.  A  part 
of  the  capital  of  railroads,  manufacturing  establish- 
ments, and  municipalities,  that  are  making  it  pos- 
sible for  us  to  have  as  many  comforts  and  conven- 
iences as  we  now  get,  is  your  capital;  and  you  are 
being  paid  for  the  use  of  it  because  with  the  aid  of 
labor  it  produces  more  wealth.  In  fact,  a  large  part 
of  the  railroads,  the  telephones,  the  telegraphs,  and 
the  other  public  enterprises  that  add  to  the  com- 
forts and  interests  of  life  are  actually  owned  by 
these  insurance  companies.  Therefore  they  are 
owned  by  you  and  others  who  have  furnished  insur- 
ance money. 

§  336.  Saving-bank  Deposits  as  Capital. — A  large 
part  of  the  money  deposited  in  savings  banks  is  lent 


CAPITAL  AND  ITS  CONTROL  303 

by  the  banks  to  the  railroads,  manufacturing 
establishments,  and  municipalities,  and  it  is  the 
amount  earned  by  the  banks  through  these  enter- 
prises that  enable  your  bank  deposits  to  grow.  Your 
capital  enables  the  enterprises  to  do  more  work  and 
to  produce  more  goods;  and  that  is  why  they  pay 
interest. 

§  337.  Who  Owns  the  Capital  of  the  Country?— 
The  capital  of  the  country  is  not  owned  chiefly  by  a 
few  rich  men:  it  is  owned  chiefly  by  the  common 
people.  It  is  owned  largely  by  those  who  hold  sav- 
ings-bank deposits  and  insurance  iDolieies,  and  by 
those  who  own  a  few  shares  of  stock  which  they  have 
purchased  by  means  of  saving,  often  hard  and  al- 
most cruel,  that  you  and  others  like  you  have  made. 
Of  all  railroad  stocks  in  the  United  States,  about 
92  per  cent  are  owned  by  holders  of  few  shares 
only.  The  stock  of  one  large  railroad  is  held  by  more 
than  one  hundred  thousand  owners,  and  almost  half 
of  these  are  women.  Of  the  stock  of  another,  with 
twenty-seven  thousand  holders,  and  nearly  one-half 
women,  more  than  twelve  thousand  holders  are 
owners  of  fewer  than  eleven  shares  each.  The  sav- 
ings-banks of  Massachusetts  alone  hold  over  one 
billion  dollars  of  investments  of  capital  in  business 
and  government  enterprises.  The  insurance  com- 
panies of  the  United  States  have  invested  four  bil- 
lion three  hundred  fifty  millions  in  entei'prises,  and 
this  is  the  property  chiefly  not  of  the  rich  but  of  the 
thrifty  common  people.  The  colleges  of  the  country 
have  about  $550  invested  for  each  student  enrolled, 
and  from  the  earnings  of  these  investments  of  cap- 
ital the  colleges  are  in  part  supported. 


304  BANKING,  CREDIT  AND  FINANCE 

§  338.  Who  Controls  Capital  Today?— Sometimes 
it  is  said  that  though  the  capital  of  the  country  is 
owned  by  the  people,  the  bulk  of  it  is  controlled  by  a 
comparatively  few  men.  That  is  true.  Why*?  Be- 
cause skill  in  management  is  a  rare  faculty  and  is 
at  the  same  time  a  necessity  for  producing  wealth 
today.  N'either  the  average  capitalist  nor  the  avei'- 
age  laborer  is  able  to  manage  wisely  what  he  con- 
tributes to  the  production  of  wealth.  Management 
of  a  business  requires  knowledge  and  judgment  of 
markets,  both  for  buying  and  for  selling,  knowledge 
and  judgment  of  qualities  of  goods,  judgment  of 
economical  processes  of  manufacture  and  distribu- 
tion. Knowledge  and  judgment  of  human  nature, 
experience  and  judgment  in  getting  along  smooth- 
ly with  people,  knowledge  of  world  conditions, 
and  a  great  number  of  other  things,  such  as  a  knack 
of  foreseeing  w^hat  is  going  to  happen  in  the  busi- 
ness world.  The  skilful  manager  contributes 
more  by  his  thoughtful  management  to  the  pro- 
duction of  wealth  than  much  direct  labor  and  much 
capital,  and  that  is  why  he  is  so  highly  paid.  He  is 
usually  cheap  at  the  price.  Every  large  business 
house  is  looking  for  more  men  with  good  managerial 
knowledge  and  judgment,  and  will  pay  big  salaries 
to  them.  Such  men  often  become  important  capital- 
ists because  they  earn  much  in  salaries,  save  much, 
and  earn  much  with  their  savings;  but  they  become 
capitalists  in  the  same  way,  and  with  the  identical 
right,  that  wage-earners  on  small  pay  become  cap- 
italists—  by  saving  rather  than  spending  their  earn- 
ings. 


CAPITAL  AND  ITS  CONTROL  305 

§  339.  The  Saving  and  the  Unsaving.— Have 
your  neighbors  and  acquaintances  saved  as  you 
have?  Doubtless  some  have  not  saved,  because  their 
incomes  were  small  and  their  families  large,  and  they 
had  no  margin  out  of  which  savings  could  be  wisely 
made.  Others,  on  the  other  hand,  have  failed  to  save 
simply  because  they  see  the  present  only  and  have 
no  thought  for  the  future.  Some  of  them  think  that 
the  world  owes  them  a  living,  and  therefore  it  is  un- 
necessary that  they  should  save.  They  are  glad  to 
make  use  of  the  capital  of  the  world,  but  do  not  wish 
to  contribute  to  it.  Some  of  them  doubtless  think 
that  you  have  been  foolish  to  save;  for  they  think 
that  savings  should  be  made  not  by  individuals  but 
by  the  state.  Some  wish  to  substitute  states  savings 
and  state  capital  for  individual  savings  and  individ- 
ual capital,  and  they  wish  to  seize  all  capital  now 
in  existence  and  make  a  common  state  capital  fund. 
Of  the  justice  of  this  as  between  those  who  have  been 
thrifty  and  have  saved  and  those  who  have  been 
thriftless  and  have  spent,  nothing  need  be  said. 

§  340.  Two  Systems. — Since,  however,  the  growtb 
of  capital  is  necessary  if  the  world  is  to  continue 
producing  wealth  as  it  now  produces  it,  and  since 
the  total  wealth  to  be  distributed  cannot  be  increased, 
unless  the  total  capital  for  producing  it  is  increased, 
a  comparison  of  the  two  methods  for  the  future 
provision  of  capital — individual  control  or  state  con- 
trol— ^is  important  for  everyone  to  make. 

§  341.  The  End  of  Private  Saving.— If  the  state  is 
to  control  capital  and  allow  no  one  to  get  an  income 
from  the  protection  or  use  of  it,  no  one  will  have 


306  BANKING,  CREDIT  AND  FINANCE 

much  motive  to  save;  for  all  one  can  do  with  saving 
is  to  leave  it  in  the  hands  of  the  State,  and  the  one 
wlio  saves  will  be  no  better  off  than  the  one  who  does 
not.  Private  voluntary  saving  will  largely  stop — 
and  many  opponents  of  what  they  call  capitalism 
wish  to  prevent  people  from  leaving  what  they  call 
wealth  to  their  children — in  which  case  the  last 
motive  to  save  will  be  gone,  so  the  State  will  have  to 
provide  the  saving — for  capital,  as  we  have  seen,  in 
the  form  of  materials  of  manufacture,  machinery, 
and  transportation  facilities,  etc.,  must  grow  with 
growing  population. 

§  342.  The  Beginning  of  State  Saving.— Yet  even 
the  state  can  provide  for  saving  in  only  two  ways; 
taxation,  and  giving  in  wages  less  than  the  total 
produced;  that  is,  it  will  either  take  away  people's 
earnings  as  taxes,  or  it  will  hold  back  at  the  source 
a  part  of  the  product.  If,  moreover,  as  is  often  rec- 
ommended, the  amount  of  taxes,  or  withholdings 
of  earnings,  is  so  large  from  those  who  produce  most 
that  it  brings  them  nearly  to  an  equality  with  those 
Avho  produce  least,  people  will  have  no  inducement 
to  take  highly  paid  positions.  They  will  not  by  study 
or  training  or  care  qualify  themselves  for  high-paid 
positions.  They  will  look  for  comfortable  work, 
easily  learned,  at  merely  comfortable  pay;  for  they 
will  be  no  better  off  in  better  jobs.  Then,  doctors, 
engineers,  inventors,  managers,  etc.,  will  be  scarce. 
What  happened  in  Russia  will  happen  here.  The 
people  there  died  for  lack  of  medical  care,  and  pro- 
duction has  fallen  off  because  the  people  able  to 
direct  industry  are  no  longer  directing  it.  No 
government  of  whatever  kind  can  allow  things  to  run 


CAPITAL  AND  ITS  CONTROL  307 

along  in  tMs  way,  for  weKare  depends  upon  produc- 
tion. 

§  343.  The  Method  of  State  Saving.— Although  it 
is  good  theory  to  say  that  under  state  control  of 
capital  everybody  would  choose  such  work  as  he 
wishes  and  is  competent  for,  in  practice  the  thing 
is  not  feasible.  Suppose  forty  people  wish  to  be 
doctors  in  a  certain  town,  but  only  twenty  are 
needed.  The  forty  people  must  be  supported,  but  the 
state  cannot  afford  to  support  twenty  in  idleness — 
also  most  people  would  choose  work  for  which  they 
were  not  needed,  and  the  few  workers  would  not  be 
enough  to  support  the  non-workers.  The  state,  if  it 
furnishes  the  capital,  must  control  the  use  of  that 
capital  and  choose  the  users  of  it.  This  is  what  most 
people  fail  to  realize — that  when  the  state  controls 
capital  and  industry,  it  must  control  the  workers,  for 
there  is  then  only  one  employer  and  the  state  must 
support  all  the  people.  This  we  don't  see  at  first, 
when  only  a  few  industries  are  controlled  by  the 
state — like  the  post  office;  but  when  all  are  so  con- 
trolled, there  is  bound  to  be  conscription  of  labor — of 
women  as  well  as  of  men. 

The  man  who  has  remarkable  skill  as  a  craftsman, 
but  who  at  the  same  time  is  fond  of  the  country  and 
wishes  to  work  as  a  farmer,  may  nevertheless  be  put 
to  work  in  the  city  where  his  talents  may  be  used 
to  the  utmost,  in  spite  of  the  fact  that  his  desire  is  to 
remain  in  the  country.  The  man  who  loves  the  city 
but  has  no  particular  skill  at  any  work  required  in 
the  city,  especially  since  there  will  be  a  great  sup- 
ply of  that  kind  of  labor,  may  be  ordered  to  live  in 


308  BANKING,  CREDIT  AND  FINANCE 

the  country  and  do  rougli  farm  work,  even  though 
he  would  rather  at  a  very  much  smaller  income  live 
in  the  city  and  have  the  comforts  of  that  life.  Since 
all  capital  will  belong  to  the  state,  there  will  be  no 
capital  by  which  a  man  may  start  an  enterprise  of 
his  own  except  with  the  permission  of  the  state;  he 
may  not  even  start  a  little  store  in  which  he  may 
delight  to  spend  his  time  and  earn  a  modest  living. 
The  very  essence  of  state  control  of  capital  is  that 
there  shall  be  no  profits  arising  from  the  handling 
of  capital;  so  no  one  can  be  privileged  to  handle 
the  capital  and  earn  profits  except  by  the  direction 
of  the  state. 

In  a  way,  the  arrangement  sounds  ideal;  for 
everyone  will  do  the  thing  for  which  he  is  best  suited, 
will  be  assigned  to  work  and  therefore  need  not  worry 
about  a  career,  the  state  will  provide  all  the  necessary 
capital  and  education,  and  everyone  will  be  assured 
of  a  comfortable  living. 

§  344.  What  is  the  State? — This  leads  to  consider- 
ation of  another  phase  of  the  scheme  The  state, 
though  a  very  powerful  thing,  does  not  exist  entirely 
independent  of  human  beings.  The  state  cannot  run 
itself,  for  it  is  not  a  thing  in  itself;  it  is  a  method  of 
administration  through  human  beings.  Under  the 
present  system  of  so-called  ''Capitalism"  there  are 
many  people  who  try  to  take  advantage  of  their 
neighbors — particularly  of  those  people  who  are  not 
their  neighbors  and  whom  therefore  they  do  not 
think  of, — ^because  human  nature  is  not  such  that 
people  can  ordinarily  be  trusted  to  take  care  of 
other  people  better  than  those  other  people  can  take 
care  of  themselves.   It  chances,  too,  that  other  people 


CAPITAL  AND  ITS  CONTROL  309 

besides  capitalists  take  advantage  over  others.  Th3 
people  who  pay  wages  are  often  themselves  wage 
earners,  and  they  are  sometimes  treated  unfairly  by 
other  wage  earners  as  well  as  by  capitalists;  for 
sometimes  a  wage  earner  working  for  another  wage 
earner  gives  short  hours  and  inefficient  work  while 
he  nevertheless  draws  full  pay.  Often,  too,  the  wage 
earner  gives  the  capitalist  a  smaller  retura  in  in- 
efficient work  than  he  has  agreed  to  give. 

Thus  some  capitalists  and  laborers  reap  where  they 
have  not  sown;  yet  many,  both  of  capitalists  and 
laborers,  refuse  to  take  unfair  advantage.  We  have 
both  the  sheep  and  the  goats  in  both  camps.  Unfau' 
advantage,  how^ever,  can  spring  from  only  one  con- 
dition; power.  The  complaint  against  capitalism  is 
that  capitalism  has  too  much  power.  Yet  the  power 
of  capitalism  is  infinitesimal  in  comparison  with 
the  power  of  the  state  if  the  state  is  given  control  of 
all  the  capital  in  addition  to  all  its  present  preroga- 
tives. Who  administers  the  state  ?  Men  and  women. 
What  reason  have  we  to  believe  that  the  persons  who 
administer  the  state  under  state  control  of  capital 
and  industry  will  be  any  more  conscientious,  any 
more  efficient,  any  more  wise,  than  the  people  who 
now  administer  the  affairs  of  capitalism? 

§  345.  His  Brother's  Keeper.— But  suppose  they 
should  prove  more  just  and  wise  and  efficient!  Does 
that  mean  more  justice  and  wisdom  and  efficiency 
than  at  present?  A  man  who  is  just  and  efficient 
and  wise  in  a  small  enterprise  may  find  himself 
beyond  his  capacity  in  a  large  one.  Under  state  con- 
trol of  capital  and  industry,  all  men  are  necessarily 
economic  slaves  of  the  state.    One's  education  must 


310  BANKING,  CREDIT  AND  FINANCE 

be  chosen  by  the  state,  for  the  state  must  choose  who 
are  to  serve  it  in  different  capacities,  else  the  jobs 
may  not  be  filled.  One's  residence  must  be  chosen  by 
the  state,  else  the  work  may  not  get  done.  One's 
occupation  must  be  chosen  by  the  state,  for  there  is 
no  employer  but  the  state.  No  alternative  is  left; 
for  no  one  can  have  an  income  except  from  the  state. 
And  who  does  the  choosing  for  the  state  ?  Men  and 
women  quite  as  subject  to  temptation,  quite  as  in- 
efficient, quite  as  lacking  in  wisdom,  as  the  managers 
of  capital.  What  man  or  woman  is  fit  to  be  placed 
in  such  a  position  of  power  over  his  fellows  as  to 
prescribe  his  education,  his  residence,  his  occupation? 
Any  honest  person  would  pray  to  be  delivered  from 
such  responsibility  over  the  lives  of  men  and  women, 
youths  and  maidens;  and  yet  under  state  control  of 
industry  and  enterprise  thousands  of  such  absolute 
directors  of  other  people's  affaii's  would  be  needed 
iti  every  large  community. 

§  346.  The  "Slavery''  To  Capital.— It  is  well 
known  that  business  cannot  be  carried  on  by  com- 
mittees: committees  can  pass  laws  and  make  de- 
cisions, but  the  carrying  out  of  those  decisions  must 
be  done  by  single  individuals.  There  may  be  appeals 
and  reversals,  but  there  will  be  no  getting  out  of  the 
system  of  individual  control.  Whatever  a  man's 
wishes  or  ambitions  or  hopes,  whatever  his  effort 
and  accomplishment  in  fitting  himself  for  something 
else,  whatever  his  thrift,  he  cannot  escape  from  his 
particular  assignment  to  work  unless  he  can  convince 
his  administrative  superior  that  he  had  better  be 
shifted.  He  cannot  escape,  for  there  is  nowhere  else 
to  go.   He  cannot  work  without  capital;  and  yet  he  is 


CAPITAL  AND  ITS  CONTROL  311 

forbidden  to  obtain  or  use  capital  except  on  orders 
of  those  administering  state  capital.  There  is  much 
talk  nowadays  of  the  slavery  of  workers  to  capital- 
ists; but  only  under  rare  circumstances  is  any 
particular  employe  dependent  upon  any  particular 
employer  or  group  of  employers.  Yet  under  state 
operation  of  industry  every  human  being  will 
be  absolutely  under  the  control  of  other  human 
beings  who  happen  to  be  chosen  for  administration. 
This  would  not  be  the  exceptional  case  as  it  now  is : 
it  would  be  the  very  essence  of  the  system.  This  is 
for  everyone  nearer  slavery  than  anything  now  ex- 
istmg  in  any  civilized  country  even  in  the  worst  case 
of  control  of  the  less  fortunate  by  the  more  fortunate. 
So  far  as  industry  is  concerned,  it  is  absolute  slavery. 

§  347.  The  Effect  of  Slavery.— Every  student  of 
history  knows  something  of  the  effect  of  slaver5^ 
Slaves  become  shiftless,  irresponsible,  lazy.  A  nation 
in  which  men  have  no  freedom  of  choice,  no  possible 
satisfaction  of  ambition  except  on  the  approval  of  an 
inescapable  superior,  no  hope  of  establishing  a  "  fix- 
ture'^  that  is  subject  to  their  owti  control  only,  is 
doomed,  for  the  springs  of  energy  are  destroyed.  A 
man  may  struggle  and  work  for  another,  a  loved  one 
or  even  a  stranger;  but  he  will  not  do  so  when  he 
fears  that  the  fruit  of  his  labor  will  be  taken  from  him 
or  will  be  squandered  through  wastefulness.  Even 
the  administrators,  moreover,  will  have  little  incen- 
tive to  be  efficient. 

All  this  means  that  under  such  a  system  of  pro- 
duction wealth  will  heavily  decline.  When  wealth  is 
declining,  none  can  get  more  wealthy.    Even  though 


312  BANKING,  CREDIT  AND  FINANCE 

a  redistribution  may  take  from  some  and  give  to 
others,  tlie  gain  to  the  new  owner  cannot  last  long; 
for  wealth  is  perishable.  Little  of  our  total  wealth 
persists  year  after  year;  it  is  recreated  year  by  year 
— ^new  crops  from  the  seed  of  the  old,  new  machines 
to  take  the  place  of  the  old  worn  out,  new  goods  to 
take  the  place  of  old  consumed  in  work  and  play. 
Unless  the  people  work  to  recreate  wealth  annually, 
all  will  be  poor  together.  Anything  w^hich  destroys 
the  motive  to  industry  makes  people  poor,  even  if 
they  should  seize  the  wealth  of  the  well-to-do,  and 
actually  leaves  them  poorer  in  the  end  than  if  they 
had  not  seized  property  but  had  continued  to  recreate 
wealth.  The  limit  to  all  wealth  is  the  production 
of  w^ealth  and  both  rich  and  poor  are  soon  reduced 
to  extreme  poverty  if  wealth  is  not  recreated  con- 
stantly. 

§  348.    The  Weakness  of  Capitalism.— No  one 

pretends  that  our  present  system  is  working  properly 
or  that  it  is  in  itself  perfect.  Like  a  system  of  state 
control,  it  must  be  administered  by  fallible  human  be- 
ings. It  is  based,  however,  on  recognition  of  the  fact 
that  capital  is  necessary  to  modern  production,  that 
compensation  for  the  use  of  capital  is  the  best  as- 
surance that  capital  will  be  provided,  and  that  all 
men  should  be  given  the  opportunity  to  own  and 
control  capital  and  to  dispose  of  their  faculties  in 
the  best  market.  Where  the  present  system  of  pri- 
vate control  breaks  down  is  in  exceptional  circum- 
stances of  sickness,  of  ignorance,  of  tragic  handicap. 

§  349.    Extraordinary  Profits. — The  present  sys- 
tem is  sometimes  thought  to  have  broken  down  when 


CAPITAL  AND  ITS  CONTROL  313 

it  has  not,  for  often  injustice  is  thought  to  be  where 
it  is  not.  Sometimes,  for  example,  the  income  from 
capital  is  much  larger  than  is  necessary  to  stimulati' 
the  accumulation  of  capital,  and  much  larger  than 
normal,  and  injustice  appears  to  lie  there.  It  is 
equally  true  that  sometimes  labor  (mental  or  man- 
ual) appears  to  receive  much  more  than  enough  to 
maintain  it  in  every  comfort  and  privilege  while  other 
labor  is  in  straits.  Usually,  however,  such  conditions 
are  both  extraordinary  and  unavoidable  (unless,  in- 
deed, freedom  is  to  be  destroyed).  We  have  already 
seen  that  great  managerial  ability  brings  high  sal- 
aries because  such  ability  is  scarce  and  highly  produc- 
tive. Managerial  ability  of  some  sort,  good  or  medi- 
ocre, is  needed  almost  everywhere,  and  even  lowest 
pay  for  managers  must  be  enough  to  attract  the  last 
men  needed  to  get  the  managerial  work  done.  If  a 
man  is  better  than  the  poorest  grade  required,  he 
can  get  a  better  salary  largely  proportioned  to  the 
superiority  of  his  productive  capacity.  So  the  sal- 
ary is  extraordinary  w^hen  the  ability  is  extraordi- 
nary. 

Similarly,  when  the  community  needs  certain  goods 
it  must  pay  a  price  high  enough  to  bring  forth  the 
goods  it  will  pay  for.  If  what  it  needs  cannot  be  pro- 
duced by  the  most  efficient  firms,  prices  must  go  high 
enough  to  induce  less  efficient  firms  to  turn  to  that 
production.  The  less  efficient  firms  will  get  normal 
profits,  and  this  leaves  for  the  more  efficient  firms 
profits  larger  than  normal — for  there  cannot  normally 
be  different  prices  in  the  same  market.  If  there  were 
to  be  different  prices,  who  should  decide  which  people 
should  buy  at  one  price  and  which  at  another?  These 


314  BANKING,  CREDIT  AND  FINANCE 

extra  profits  are  not  exploitation  of  the  people;  what 
has  happened  is  simply  that  what  is  one  man's  neces- 
sary price  leaves  a  margin  for  another;  and  that  mar- 
gin is  reward  of  efficiency,  like  the  reward  of  the  able 
manager.  The  possibility  of  it  is  one  of  the  induce- 
ments to  efficiency,  and  is  one  of  the  compensations 
for  risk  offsetting  the  losses  when  the  chances  of  busi- 
ness go  the  other  way.  The  only  avoidance  of  this 
sort  of  possibility  of  extra  profit  is  the  sort  of  govern- 
mental direction  just  discussed — in  which  a  small 
part  of  the  connnunity  has  absolute  economic  control 
of  the  rest,  and  the  rest  are  in  effect  economic  slaves. 

§  350.  Expenditures  Of  The  Rich. — The  common 
notion  that  these  extra  incomes  are  consumed  by 
those  who  in  the  first  instance  receive  them  needs 
examination.  A  study  of  the  lives  of  the  richest  men 
shows  that  they  actually  consume  little  more  wealth 
than  the  rest  of  us.  They  can  eat  little  more  (and  the 
more  expensive  food  that  a  few  of  them  eat  actually 
results  in  discomfort  and  disease,  while  most  of  them 
maintain  simple  tables);  they  cannot  wear  more 
without  discomfort  (and  many  of  them  prefer,  and 
choose  whenever  they  can  do  so  without  endanger- 
ing their  business  influence,  the  simple  easy  clothing 
of  the  workingman's  type) ;  and  much  of  the  balance 
of  their  expenditures  is  less  for  personal  satisfaction 
than  for  acquiescence  in  custom.  The  fine  estate  that 
a  rich  man  owns  can  gratify  him  usually  in  but  few 
ways:  so  far  as  the  gratification  is  from  pride,  it  is 
short-lived,  for  pride  is  never  satisfied;  and  so  far  as 
it  is  from  visual  enjoyment  of  its  beauty,  he  has  no 
monopoly,  for  often  the  poor  man  trudging  to  his 
work  gets  more  satisfaction  from  the  rich  man's 


CAPITAL  AND  ITS  CONTROL  315 

lawns  and  flowers  and  trees  than  the  man  who  pays 
for  it. 

The  rest  of  the  large  income  of  the  rich  man  is 
usually  saved  and  becomes  capital — furnishing  the 
means  by  which  the  railroads,  the  factories,  and  the 
municipalities  employ  labor  and  make  things  for  us 
all;  and  this  is  as  it  would  be  under  governmental 
control  of  capital,  except  that  usually  the  man  who 
has  been  interested  to  save  capital  is  a  better  judge 
of  its  wise  use  than  a  man  chosen  politically  as  an 
administrator  for  capital  in  which  he  has  no  inter- 
est. Usually,  too,  the  man  of  large  income  has 
large  responsibilities  that  leave  him  few  hours  with 
free  and  easy  mind  for  either  idling  or  personal  con- 
sumption of  wealth.  There  are  few  "idle  rich." 
The  man  of  large  responsibilities  thinks  of  a  forty- 
hour  week  as  a  vacation.  Often  when  he  seems  to  be 
idling  he  is  hardest  at  work,  solving  knotty  prob- 
lems, feeling  large  property  interests  and  large 
human  interests  at  stake,  and  knowing  that  he  must 
not  err.  The  really  idle  rich,  on  the  other  hand,  like 
the  idle  poor,  have  no  excuse  for  existence.  Con- 
tinued idleness  should  be  made  impossible  for  them. 

§  351.  The  Way  of  Freemen.— The  effort  to  make 
impossible  economic  injustice  and  handicap  is  now 
occupying  many  of  the  fairest-minded  and  wisest 
men  and  women  of  the  country.  Many  of  them  are 
capitalists  or  representatives  of  capital,  and  these 
are  mostly  also  workers,  hard  workers,  on  salaries; 
many  of  them  are  primarily  workers,  and  these  are 
also  most  all  capitalists— owners  of  homes,  of  bank 
deposits,  of  insurance  policies,  of  stocks,  of  bonds; 


316  BANKING,  CREDIT  AND  FINANCE 

many  of  ihem  are  not  directly  connected  with  either 
capital  or  labqr  primarily  as  capitalists  or  ^age 
earners,  but  are-  professional  men  who  are  both  capi- 
talists (because  of  their  savings  from  hard  earnings) 
and  workers  (whose  hom*s  of  activity  know  no 
schedule  except  the  call  of  duty,  whether  those  hours 
be  forty  or  seventy) .  They  are  trying  to  find  a  way 
to  stop  the  exploiting,  to  give  the  worker  all  he  can 
produce  (without  working  so  hard  as  to  sacrifice 
what  is  worth  while  in  life),  to  insure  the  right  to 
control  what  one  has  earned,  and  at  the  same  time  to 
maintain  one's  right  to  freedom — without  interfer- 
ence by  tragic  circmnstance,  by  personal  whim  or 
malice,  or  by  unnecessary  governmental  direction. 
They  believe  that  this  is  more  easily  possible  under 
a  system  which  retains  individual  right  to  save,  to 
use  one's  own  capital,  and  to  control  one's  own 
capital,  than  under  a  system  of  governmental  control 
of  capital  and  labor  administered  by  fallible  men  and 
women  exercising  well-nigh  unlimited  power  over 
their  fellow  men  and  women.  This  is  the  very  spirit 
of  Americanism,  or  the  rule  of  all  the  people,  while 
the  other  is  the  spirit  of  oligarchy,  or  the  rule  of 
a  few. 

Note. — The  author  of  the  foregoing  is  a  worker  and  not  a  capitalist, 
and  it  is  as  a  worker  that  he  desires  to  preserve  the  right  of  private 
capital.  He  has  saved  out  of  his  hard-won  earnings,  but  his  savings 
have  gone  into  home  and  land  and  books  and  education  and  insurance 
for  his  family.  He  believes  that  he  has  a  better  right  than  anyone 
else  to  determine  what  occupation  on  his  part,  what  choice  of  residence, 
what  care  of  the  land  about  his  home,  what  higher  education  for  his 
children,  what  protection  for  the  future,  are  best  adapted  to  the 
ultimate  welfare  of  his  family.  His  right  to  the  occupation,  the  resi- 
dence, the  land,  education,  the  protection,  on  the  other  hand,  must 
lie  in  his  having  earned  and  saved  them, — or  might  lie  in  another's 
having  earned  them  voluntarily  for  him.  He  believes  that  if  he  should 
choose  from  now  on  to  devote  his  savings  to  the  accumulation  of 
funds  for  assistance  in  manufacturing  goodg,  or  in  distributing  goods 


CAPITAL  AND  ITS  CONTROL  817 

by  sale,  or  in  renderinr  public  service,  to  forbid  him  to  save  and  so 
to  use  what  he  had  saved,  and  to  forbid  him  to  allow  someone  else 
to  use  his  savmps,  and  to  forbid  him  to  demand  and  collect  compensa- 
tion from  anyone  so  using  his  savings,  would  be  a  fundamental  viola- 
tion of  his  nghts  as  a  man.  He  would  resist  to  the  utmost  any 
attempt  to  mterfere  with  those  rights. 


Questions  for  Review,  Chapter  XV. 

1.  What  is  the  true  economic  view  of  a  capitalist? 

2.  How  are  the  savings  of  the  people  employed  in  the 
enterprises  of  capital? 

3.  As  the  product  of  labor,  what  does  the  existence  of 
capital  prove? 

4.  Is  it  possible  for  a  community  to  get  along  without 
capital  ? 

5.  What  effect  does  the  possession  of  capital  have  in 
wartime  ? 

6.  What  effect  does  the  use  of  insurance  premiums  as 
industrial  capital  have  upon  the  insured? 

7.  How  does  the  use  of  savings  deposits  as  capital  bene- 
fit the  depositor? 

8.  Who  are  the  principal  owners  of  the  capit-al  of  the 
country  ? 

9.  Why  does  the  control  of  capital  fall  into  the  hands 
of  comparatively  few  men? 

10.  Why  would  State  control  of  capital  destroy  the  in- 
centive to  thrift  and  saving? 

11.  Show  how  State  control  of  capital  would  involve  State 
control  of  the  workers  and  result  in  conscription  of  labor. 

12.  How  does  the  human  element  enter  into  all  State 
control,  and  dominate  it? 

13.  Show  how  the  destruction  of  the  motive  to  industry, 
with  State  control  of  capital,  would  leave  the  people  poorer 
in  the  end. 

14.  What  are  the  chief  weaknesses  of  the  system  of 
private  control  of  capital? 


318  BANKING,  CREDIT  AND  FINANCE 

15.  What  are  the  economic  effects  of  the  possibility  of 
extraordinary  profits?  Is  this  possibility  a  danger  to  the 
community  ? 

16.  How  is  the  large  income  of  the  rich  man  generally 
used? 

17.  Why  does  the  system  of  private  capital  embody  the 
spirit  of  Americanism? 


CHAPTER  XVI 

Investments 

Note. — In  this  chapter  a  noted  Chicago  banker  discusses  a  subject 
of  importance  to  every  student  of  business.  The  text  originated  in  the 
form  of  a  lecture  to  the  students  of  the  University  of  Chicago.  The 
author,  Mr.  David  R.  Forgan,  is  president  of  the  National  City  Benk 
of  Chicago.  The  figures  which  he  gives  refer  to  a  period  prior  to  the 
World  War.— Editor. 

Section  352.  Meaning  of  Investment. — There  is  a 
sense  in  which  all  business  enterprises  are  invest- 
ments. To  build  a  ship  or  a  railroad,  to  start  a 
store  or  factory,  to  pay  wages  or  place  an  advertise- 
ment— to  do  anything,  in  short,  which  involves  an 
outlay  of  money  for  the  purpose  of  increasing  it — 
is  an  investment  of  capital.  That  is  the  sense  in  which 
political  economists  use  the  word,  but  in  common  use 
it  has  a  more  restricted  meaning,  namely,  the  outlay 
of  money  in  the  purchase  of  property  or  seciu'ities 
which  are  expected  to  yield  a  sm^e  and  regular  in- 
come without  further  effort  on  the  part  of  the  in- 
vestor. This  discussion  will  be  limited  to  what  may 
be  included  in  that  definition. 

At  the  outset  it  may  be  well  to  have  a  clear  view 
as  to  what  funds  are  available  for  an  investment;  or 
to  answer  the  question  so  often  asked  as  to  where  all 
the  money  comes  from  to  pay  for  the  enormous  issues 
of  securities  which  are  constantly  being  brought  out. 

319 


320  BANKING,  CREDIT  AND  FINANCE 

A  writer  on  this  subject  begins  with  the  statement 
that  the  bank  deposits  of  the  United  States  increased 
in  seven  years  by  $4,000,000,000,  and  that  "the  effort 
to  place  this  enoiTQOus  amount  of  new  capital  dis- 
organized the  entire  field  of  investment."  This  is 
not  correct.  If  the  author  had  looked  deeper,  he 
would  have  seen  that  the  increase  in  loans  had  kept 
pace  with  the  increase  of  deposits,  and  that  the  banks 
had  no  greater  percentage  of  reserves  than  before. 
In  fact,  about  the  time  this  statement  appeared  the 
banks  in  New  York  were  under  their  legal  reserves, 
and  money  was  bringing  good  rates  all  over  the 
country  because  it  was  scarce.  Only  such  portion  of 
the  increase  of  deposits  as  represented  the  savings 
of  the  masses,  or  the  surplus  earnings  of  commercial 
enterprises,  was  available  for  investment.  The  re- 
mainder, which  constituted  by  far  the  larger  part  of 
the  deposits,  represented  only  expansion  of  credit, 
and  was  not  available  for  permanent  investment. 

§  353.  Bank  Deposits  are  Largely  Credits. — ^It  is  a 

common  error  to  consider  bank  deposits  as  "money  in 
the  bank,"  whereas  they  are  largely  composed  of 
credits  on  a  ledger.  When  a  banker  lends  a  customer 
$100,000  he  takes  the  customer's  note  and  credits  the 
customer's  account  with  the  i)roceeds.  The  transac- 
tion iDcreases  both  the  deposits  and  loans  by  $100,000, 
but  adds  nothing  to  the  "money  in  the  bank."  Even 
when  the  customer  draws  his  checks  upon  the  credit, 
it  does  not  necessarily  follow  that  the  money  m  the 
bank  is  reduced,  for  his  checks  either  go  to  the  credit 
of  another  customer  of  the  bank  or  they  find  their 
way  into  another  bank  and  are  offset  by  similar  trans- 
actions in  that  bank, 


INVESTMENTS  32i 

This  credit  of  $100,000  created  by  the  banker  dis- 
counting the  note  of  his  customer  performs  all  that 
actual  money  can  perform,  and  practically  adds  that 
amount  to  the  resources  of  the  business  communitx^ 
while  it  is  extant.  If  the  credit  has  been  wisely  grant- 
ed, the  note  will  be  paid  when  due  by  the  customer 
accumulating  enough  credit  balance  in  his  bank  ac- 
count and  then  giving  his  check  for  his  note.  The 
transaction  will  reduce  the  bank's  assets  and  de- 
posits by  $100,000;  but  it  will  not  increase  nor  dimin- 
ish the  **money  in  the  bank.'' 

§  354.  Little  Actual  Cash  Demanded.— In  only 
a  small  portion  of  the  transactions  thus  accomplished 
by  credit  will  actual  cash  be  demanded,  and  against 
this  the  banker  must  keep  a  certain  percentage  of 
his  deposits  in  cash  reserves.  If  the  credit  be  granted 
to  a  worthless  customer  who  cannot  retire  it  when 
due,  then  the  bank  loses  the  amount,  because  its  re- 
sources are  reduced  by  $100,000  while  its  liabilities 
remain  the  same.  Right  there  in  the  difference  be- 
tween redeemable  and  irredeemable  credit  lies  all 
the  difference  between  good  banking  and  bad  bank- 
ing, good  currency  and  bad  currency,  good  invest- 
ment securities  and  bad  investment  securities. 

Thus  the  increase  of  bank  deposits  was  due  more  to 
the  extension  of  credit  than  to  an  increase  of  actual 
money  in  the  banks,  or  of  funds  looking  for  invest- 
ment. In  like  manner,  when  deposits  decrease  it  is 
a  contraction  of  credit  which  takes  place  rather  than 
a  withdrawal  of  money. 

In  October,  1893,  for  example,  there  was  more 
money  in  the  national  banks  by  $28,000,000  than 


322  BANKING,  CREDIT  AND  FINANCE 

there  was  in  1892,  yet  the  deposits  were  $500,000,000 
less  on  account  of  the  contraction  of  credit  due  to  the 
panic — the  loans  and  other  credit  assets  being  cor- 
respondingly reduced. 

§  355.  The  Potency  of  Credit. — ^In  any  financial 
discussion  we  shall  soon  go  astray  if  we  lose  sight 
of  the  place  and  potency  of  credit.  It  is  estimated 
that  90  per  cent,  of  all  business  transactions  are 
done  on  credit,  and  the  currency  used  in  the  majority 
of  cases  composing  the  other  10  per  cent,  is  only 
credit  in  another  foim.  In  credit  modern  finance 
lives,  moves,  and  has  its  being.  It  is  not  merely 
the  means  by  which  you  buy  and  buy  and  pay  by- 
and-by. 

It  is  difficult  to  define,  but  we  may  say  credit  is  the 
medium  through  which  the  representatives  of  prop- 
erty or  value  may  be  exchanged.  The  bank  cus- 
tomer's note  is  in  one  sense  only  a  slip  of  paper,  but 
it  represents  all  the  property  owned  by  the  makers. 
In  the  same  way  bonds  represent  the  property  they 
are  based  upon;  certificates  of  stock  represent  the 
capital  of  the  company  which  issues  them,  and  bank 
deposits  stand  for  actual  cash.  Credit  rests  on  con- 
fidence, which  is  simply  a  reflection  of  the  existing 
conditions.  When  confidence  prevails,  credit  ex- 
pands easily— that  is,  the  representatives  of  prop- 
erty and  cash  are  readily  interchanged.  When  con- 
fidence is  shaken,  credit  contracts  in  proportion  to 
the  gravity  of  the  cause,  and  interchange  becomes 
correspondingly  difficult.  If  confidence  be  destroyed? 
there  is  a  panic,  when  it  is  almost  impossible  for  the 
bank  customer  to  negotiate  his  note,  the  railroad  to 
sell  its  bonds,  or  the  industrial  company  to  float  its 


INVESTMENTS  323 

stock.    And  all  this  happens  while  the  money  in  cir- 
culation is  little,  if  any,  reduced. 

§'  356.  Recent  Expansion  of  Credit. — ^The  past 
few  years  have  witnessed  a  remarkable  expansion  of 
credit  in  this  country.  The  bank  deposits  increased 
about  $3,500,000,000,  and  new  stocks  and  bonds  is- 
sued during  the  period  probably  reached  a  total  of 
$10,000,000,000,  while  the  total  money  in  the  country, 
paper  and  metallic,  increased  only  about  $500,000,- 
000.  In  other  words,  for  every  dollar  in  money  added 
to  the  general  stock,  bank  deposits  increased  $7  and 
securities  $20.  It  is  not  necessary,  therefore,  that 
money  be  available  to  absorb  a  new  issue  of  secur- 
ities. If  there  is  room  for  them  in  this  sea  of  credit, 
they  may  be  launched  and  floated. 

When  a  new  issue  of  investment  securities  is  made, 
it  is  generally  set  afloat  as  collateral  to  an  expansion 
of  credit  by  the  banks  which  extend  to  the  broker 
or  bond  dealer  credit  with  which  to  carry  the  secur- 
ities until  a  market  is  found  for  them  among  invest- 
ors. The  rapidity  with  w^hich  investors  will  absorb 
them,  and  the  price  paid  for  them,  depend  upon  their 
desirability  and  the  condition  of  the  money  market 
— or,  more  correctly,  of  the  credit  market. 

§  357.  Effect  of  Public  Confidence.— If  confi- 
dence abounds,  people  readily  invest  in  the  repre- 
sentatives of  property — stocks  and  bonds — and  this 
creates  a  strong  demand  and  a  high  price.  On  the 
other  hand,  if  confidence  be  shaken,  people  prefer 
cash  or  its  representative — bank  balances — of  cer- 
tain value  to  securities  of  uncertain  value,  and  they 
are  slow  to  convert  the  former  into  the  latter;  and 


324  BANKING,  CREDIT  AND  FINANCE 

thus  the  demand  is  less  than  the  supply,  and  the 
price  obtained  is  consequently  lessened. 

When  conditions  are  panicky,  new  issues  of  secui*- 
ities  cannot  be  sold  at  all,  and  the  holders  of  old 
issues  become  so  anxious  to  convert  them  into  banlv 
balances  of  stable  value  that  prices  fall  far  below 
intrinsic  value,  and  then  it  is  "bargain  day"  in  the 
credit  world.  Many  rich  men  hold  their  reserves  for 
such  occasions,  which  constantly  recur,  and  they 
grow  richer  by  so  doing. 

§  358.  Funds  Available  for  Investment.— The 
funds  available  for  investment,  which  gradually  ab- 
sorb securities,  come  chiefly  from  the  following 
sources,  the  first  two  of  which  have  already  been 
suggested: 

(a)  Savings  banks  deposits — representing,  not  an 
expansion  of  commercial  credit,  but  the  savings  of 
the  common  people. 

(b)  That  portion  of  the  deposits  of  commercial 
banks  which  represents  the  accumulation  of  the  pro- 
fits of  business  and  which  may  be  withdrawn  from 
business. 

(c)  The  funds  of  life  and  fire-insurance  com- 
panies. 

(d)  The  funds  of  educational,  charitable,  and  be- 
nevolent institutions. 

(e)  The  funds  of  estates  in  cases  where  the  ex- 
ecutors decide  to  exchange  the  assets  at  risk  of  gen- 
eral business  for  jDermanent  investments,  which  call 
for  no  business  management  on  the  part  of  the  owner. 


INVESTMENTS  325 

(f)  The  funds  of  retired  business  men  who  follow 
the  same  course  for  similar  reasons. 

(g)  The  investment  accounts  of  commercial  banks 
maintained  for  the  purpose  of  having  some  assets 
which  can  be  converted  into  cash  immediately  in 
case  of  need 

(h)  That  portion  of  the  increment  derived  from 
former  investments  which  the  holders  do  not  spend. 

§  359.  Increa,se  of  Investment  Securities. — ^In 
such  good  times  as  we  had  for  several  years  prior  to 
1914,  the  combined  demand  from  all  these  sources 
was  enoimous;  hence  both  the  rise  in  the  price  of 
securities  and  the  rush  to  create  and  float  new  issues 
which  we  witnessed  during  that  period. 

We  have  no  statistics  Avhich  present  a  complete 
account  of  the  increase  in  the  supply  of  investment 
securities  in  the  United  States  during  the  period 
named.  Some  idea,  how^ever,  may  be  obtained  from 
the  amount  of  bonds  and  stocks  listed  on  the  New 
York  Stock  Exchange,  although  these  are  but  a  small 
portion  of  the  whole.  During  a  period  of  five  years 
there  were  listed  $949,516,639  bonds  and  $1,443,850,- 
208  stocks,  exclusive  of  those  which  merely  replaced 
old  securities.  In  addition  to  these,  every  village, 
town,  city,  county,  and  state  in  the  country  has  its 
own  local  securities.  New  issues  are  also  constantly 
being  created  by  new  inventions,  such  as  the  tele- 
phone, the  bicycle,  the  automobile,  etc.,  so  that  the 
estimate  of  a  total  of  $10,000,000,000  of  new  secur- 
ities issued  during  these  five  years  is  probably  not 
far  astray. 

Yet  no  question  is  more  frequently  asked  thaii 


326  BANKING,  CREDIT  AND  FINANCE 

this:  "Where  can  I  find  a  safe  investment  which  will 
yield  a  fair  rate  of  interest  T'  And  perhaps  no  ques- 
tion is  more  difficult  to  answer. 

§  360.  What  Constitutes  Desirability. — ^A  man  of 
little  experience  and  superficial  knowledge  may  an- 
swer readily  enough,  but  the  answer  will  come  slowly; 
from  a  man  of  conservative  judgment.  The  desir- 
ability of  any  investment  consists  of  three  attributes : 
(1)  Safety,  (2)  Profit,  (3)  Permanency.  All  three, 
hoAvever,  are  relative  terms.  In  investments  there  is 
no  such  thing  as  absolute  safety,  assured  profit,  or 
unchangeable  conditions.  United  States  bonds  are 
today  among  the  highest-class  investments  in  the 
w^orld;  yet  men  are  still  living  who  saw  them  go  to 
a  discount  of  78  cents  on  the  dollar.  Within  a  few 
years  their  profitableness  was  reduced  by  half,  and 
before  the  World  War  the  indications  were  that  they 
would  all  be  paid  off  within  our  own  day.  (All  we  can 
do,  therefore,  is  to  consider  the  relative  safety,  profit- 
ableness, and  permanency  of  the  different  classes 
of  investment.  There  are  investments  which  are 
more  safe  than  profitable;  others  which  are  profit- 
able, but  not  safe;  and  many  which  are  neither  safe 
nor  profitable,  but  are  certainly  permanent. 

We  shall  now  consider  the  different  kinds  of  in- 
vestments offered  in  the  United  States,  grouped  as 
far  as  possible  under  four  divisions. 

I.  Public  Securities 

§•  361.  Government  Bonds. — At  the  head  of  this 
class  stand  Government  bonds.  These  are  held 
chiefly  by  national  banks  as  security  for  their  cir- 


INVESTMENTS  327 

culation,  or  for  government  deposits,  and  by  trustees 
for  funds  in  cases  where  safety  is  a  more  important 
consideration  than  profit.  They  are  as  safe  as  any- 
thing on  earth  and  always  marketable,  but  they 
scarcely  call  for  our  consideration,  because  they  no 
longer  offer  any  attraction  to  ordinary  investors. 

One  of  the  striking  marks  of  our  national  pros- 
perity is  the  fact  that  American  investors  have  often 
been  offered  and  have  readily  accepted  participation 
in  loans  to  foreign  countries.  Russian  government 
bonds  issued  in  connection  with  their  great  railway 
a  few  years  ago  were  taken  at  a  price  yielding  4%  to 
the  investor;  the  German  loan  of  1901,  3%;  the  Eng- 
lish short  time  loan  of  1900,  3.4;  and  the  English  ir- 
redeemable consols  issued  in  1902,  about  2.6  per  cent. 

§  362.  State  Bonds. — Next  in  order  come  State 
bonds.  Their  history  is  not  one  of  the  things  we  are 
proud  of.  A  total  of  over  $300,000,000  (principal  and 
interest)  of  them  is  now  delinquent  by  reason  of  re- 
pudiation on  the  part  of  their  makers.  A  large  part 
of  this  delinquency  is  made  up  of  what  is  known  as 
*' carpet-bag"  bonds  issued  by  Southern  states  dur- 
ing the  period  of  reconstruction  and  later  repudiated 
on  the  ground  that  the  government  creating  them 
did  not  properly  represent  the  people.  But  that  is 
not  true  at  all.  Virginia,  for  example,  has  old  bonds 
outstanding  which  were  created  before  the  war  and 
which  you  can  buy  for  a  few  cents  on  the  dollar.  This 
is  possible  because  the  Eleventh  amendment  to  the 
Constitution  took  away  the  right  of  private  parties 
to  sue  States  for  payment  of  their  debts. 

It  is  probable  that  the  days  of  repudiation  are 


328  BANKING,  CREDIT  AND  FINANCE 

past,  but  history  sometimes  repeats  itself,  and  it 
is  well  for  the  purchaser  of  state  obligations  to  re- 
member that  their  payment  depends  entirely  upon 
public  morality.  If  he  confines  himself,  however,  to 
the  bonds  of  states  whose  good  financial  reputation  is 
necessary  to  the  business  interests  of  their  citizens, 
the  risk  of  loss  which  is  inherent  in  all  investments 
will  be  reduced  to  a  minimum. 

§  363.  Municipal  Bonds. — ^What  has  just  been  said 
regarding  State  obligations  applies  Avith  equal  force 
to  the  obligations  of  municipalities.  There  has  been 
much  repudiation  also  on  their  part,  but  most  of  it 
has  been  of  bonds  for  which  the  people  of  the  munici- 
palities never  received  any  consideration,  the  bonds 
having  been  issued  during  the  speculative  period 
succeeding  the  war  in  support  of  railroad  schemes. 

Unlike  States,  municipalities  can  be  forced  to  pay 
through  the  courts,  and  so  numerous  have  such  cases 
been  that  almost  every  point  concerning  the  legality 
of  municipal  obligations  has  been  finally  decided  by 
the  courts.  The  opinion  of  a  competent  lawyer  as  to 
their  validity  is  now  enough  to  satisfy  investors,  and 
such  an  opinion  is  always  offered  by  bond  dealers 
w^hen  offering  the  bonds.  Beyond  that  it  is  only 
necessary  to  ascertain  the  population,  and  the  gener- 
al prosperity  of  the  municipality,  and  the  relation 
these  bear  to  its  total  indebtedness,  in  order  to  de- 
cide upon  the  desirability  of  its  obligations  as  an 
investment. 

In  many  States  the  legal  limit  of  such  indebtedness 
is  only  5  per  cent  of  the  assessed  value  of  the  prop- 
erty wdthin  the  municipality,  and  this  is  perhaps 


INVESTMENTS  329 

only  1  per  cent  of  the  real  value.  With  this  safe- 
guard, with  our  population  increasing  at  the  rate  of 
4,000  per  day,  and  with  the  prevailing  prosperity  of 
our  country,  municipal  obligations  are  now  very 
popular  investments.  They  yield,  according  to  their 
grade,  from  3/5  to  5  per  cent  to  the  investor,  and  as 
a  class  they  are  one  of  the  best  investments  in  the 
market. 

II.  Real  Estate  Securities. 

§  364.  Speculation  and  Investment. — The  pur- 
chase of  real  estate  itself  may  be  considered  as  an 
investment  if  it  is  already  improved  and  yields  an 
income,  or  if  the  purchaser  improves  it  immediately 
after  its  purchase.  To  buy  unimproved  real  estate 
simply  with  the  hope  that  it  will  increase  in  value 
in  the  future,  is  a  speculation,  not  an  investment. 

Among  men  who  have  been  successful  in  a  small 
way  the  purchase  of  unimproved  real  estate  is  at 
times  quite  popular.  The  idea  seems  to  be  inherited 
that  to  own  a  piece  of  property  is  a  mark  of  respect- 
ability and  substance.  The  thought  that  it  cannot 
run  away  or  disappear  seems  to  make  it  safe,  and 
there  is  always  the  hope  that  it  will  increase  in  value. 
Nothing,  however,  could  be  more  delusive.  In  ninety- 
nine  cases  out  of  a  hundred  it  would  pay  better  to 
put  the  money  in  a  savings  bank  at  3  per  cent  inter- 
est. 

Even  improved  property  is  usually  unsatisfactory^ 
as  an  investment.  When  taxes,  depreciation  by  use 
and  by  change  of  style,  repairs,  insurance,  periods 
of  vacancy,  and  failure  to  collect  rents  are  taken  into 


330  BANKING,  CREDIT  AND  FINANCE 

account,  the  owners  of  real  estate  are  generally  dis- 
appointed in  the  net  results.  There  are  many  no- 
table exceptions,  of  course,  but  to  own  much  real 
estate  and  get  little  out  of  it  is  so  common  that  the 
term  *'real  estate  poor"  has  come  to  be  quite  well 
understood  among  business  men.  The  safest  way  to 
invest  money  in  real  estate  is  to  buy  it  and  lease  it 
to  others  to  build  upon.  In  good  localities  the  ground 
rent  is  assured  by  this  means,  and  this  makes  one 
of  the  safest  investments  known.  There  is  not 
enough  of  such  business,  however,  to  make  it  general- 
ly available. 

§  365.  Mortgages. — Another  way  to  invest  money 
in  real  estate  is  to  advance  it  on  mortgages,  with  a 
margin  which  should  not  be  less  than  50  per  cent. 
Even  then  you  are  not  sure  that  you  will  not  have  to 
foreclose  your  mortgage  and  take  the  property.  A 
fall  of  50  per  cent  in  the  estimated  value  of  real 
estate  during  the  currency  of  a  mortgage  even  in 
growing  and  prosperous  communities  is  by  no  means 
uncommon.  The  value  of  real  estate  is  never  more 
than  an  estimate — an  opinion — in  which  it  is  always 
difficult  to  find  two  authorities  who  agree.  There 
is  nothing  wilder  or  more  extravagant  than  the  ideas 
of  otherwise  sensible  men  on  the  value  of  real  estate 
during  a  period  of  inflation. 

A  case  in  Minneapolis  will  serve  as  an  illustration. 
A  man  after  successful  litigation  became  the  owner 
of  a  tract  of  land  near  that  prosperous  city,  valued 
in  popular  opinion  at  a  million  dollars.  He  became 
involved  in  debt  to  the  extent  of  $250,000  and 
mortgaged  all  his  real  estate  for  the  benefit  of  his 


INVESTMENTS  331 

creditors.  The  mortgage  was  foreclosed  for  the  var- 
ious creditors  by  the  leading  lawyers  of  the  city — one 
of  the  ablest  all-round  business  men — who  thus  be- 
came thoroughly  familiar  with  the  property.  A 
bank  was  one  of  the  creditors,  and  the  lawyer  in- 
formed the  bank  that  the  claim  was  quite  good  be- 
cause the  debtor  would  be  certain  to  redeem  the  prop- 
erty from  the  foreclosure.  It  was  not  redeemed, 
however,  and  the  bank  had  to  arrange  a  division  of 
the  property  among  the  creditors.  For  that  puii:)0se 
another  valuation  was  made  of  the  various  lots,  which 
amounted  in  all  to  about  $70,000.  On  that  basis  the 
million-dollar  property  was  divided,  the  best  cash 
offer  the  bank  could  get  being  about  two-thirds  of 
that  amount.  In  other  words,  the  value  of  a  tract  of 
land  contiguous  to  a  thriving  city  of  (then)  160,000 
inhabitants  shrank  in  popular  estimation  in  a  few 
years  from  $1,000,000  to  less  than  $50,000. 

Anyone  wishing  to  invest  his  money  in  a  real- 
estate  mortgage  should  make  sure  that  he  is  getting 
a  first  mortgage.  There  is  nothing  on  the  face  of  a 
mortgage  or  trust  deed  in  Illinios  and  some  other 
states  to  show  whether  a  prior  lien  exists,  and  the 
palming  off  of  a  second  or  third  mortgage  as  a  first 
is  not  an  unknown  trick.  He  should  also  be  satisfied 
that  the  title  is  clear  in  the  name  of  the  mortgagor. 
This  is  usually  evidenced*  by  a  title  guarantee  policy, 
which  is  sufficient  in  most  cases,  though  by  no  means 
infallible. 

Then  he  should  insist  on  seeing  the  property  with 
his  own  eyes.  No  matter  how  reliable  the  mortgage 
dealer  may  be,  a  purchaser  may,  by  ^dsiting  t]w 


332  BANKING,  CREDIT  AND  FINANCE 

property,  discover  something  which  may  save  him 
from  an  unsafe,  or  at  least  a  slow  and  unsatisfactory, 
investment.  It  is  not  impossible  that  he  may  discover 
that  the  huilding  shown  to  him  by  the  mortgage 
broker  as  on  the  property  is  as  yet  far  from  com- 
pleted^ And  that  only  part  of  the  money  represented 
by  the  mortgage  has  been  paid  to  the  mortgagor, 
the  balance  being  represented  by  a  credit  on  the 
books  of  the  broker  which  is  to  be  exhausted  as  the 
building  goes  on.  In  this  case  the  investor  must  trust 
to  the  broker  to  see  that  the  building  is  completed 
free  of  mechanic's  liens  and  fit  for  occupancy. 

Whether  it  is  safe  to  trust  the  broker  depends  upon 
his  financial  and  moral  standing — which  opens  up  a 
new  field  of  investigation  for  the  investor.  He  should 
also  inquire  into  the  financial  standing  of  the  mort- 
gagor. If  that  be  imsatisfactory,  the  payment  of 
interest  is  likely  to  be  irregular,  and  foreclosure  may 
become  necessary  on  account  of  the  mortgagor's 
difficulties,  although  the  property  itself  may  be  quite 
good  for  the  amount  involved.  Foreclosure  is  a  slow, 
tedious,  and  expensive  way  of  getting  money  back, 
even  if  it  does  get  it  back. 

§  366.  Building  and  Loan  Associations. — One  of 
the  worst  forms  of  investment  in  real  estate  in  the 
opinion  of  many  bankers,  is  building  and  loan  associa- 
tions. They  are  gotten  up  in  most  attractive  forms 
to  catch  the  monthly  savings  of  thrifty  people  mth 
moderate  incomes.  True,  there  are  some  of  these  in 
the  older  parts  of  the  country  that  are  apparently 
successful,  but  experience  of  them  in  the  West  leadr> 
one  to  consider  them  as,  on  the  whole,  almost  the 
easiest  concerns  to  get  your  money  into  and  the  hard- 


INVESTMENTS  333 

est  to  get  it  out  of  that  you  can  find.  Their  plans 
seem  so  simple  that  anyone  can  understand  them: 
nevertheless,  a  Chicago  man  who  is  a  thorough  ac- 
countant, lost  the  savings  of  years  in  a  building  and 
loan  association  of  which  he  himself  was  the  annual 
auditor. 

§  367.  Farm  Mortgages.— On  the  other  hand,  farm 
mortgage  are  one  of  the  best  real-estate  investments. 
Swindlers  have  not  been  unknown  along  this  luic, 
but  the  results  to  investors  have  been  as  satisfactory 
as  in  any  line  of  investments.  As  in  all  others,  pru- 
dence and  common-sense  must  be  exercised;  but  there 
are  many  corporations  and  firms  of  high  standing 
engaged  in  the  farm-mortgage  business,  and  by  deal- 
ing only  with  such,  and  avoiding  certain  states  where 
the  laws  seem  to  have  been  made  for  the  debtors,  a 
safe  and  fairly  remunerative  investment  in  farm 
mortgages  is  easily  obtained.  On  the  whole,  invest- 
ors should  remember  that  to  invest  safely  and  satis- 
factorily in  real-estate  securities  requires  more 
knowledge  of  business,  more  experience,  and  better 
judgment  than  to  invest  in  almost  anything  else. 

III. — Corporation  Bonds. 

§  368.  Railroad  Bonds. — Under  this  head  come, 
first,  railroad  bonds,  which  have  absorbed  more  cap- 
ital than  any  other  investment  in  this  country.  A 
few  years  ago  there  were  187,781  miles  of  railroad  in 
operation,  the  bonds  on  which  amounted  to  $5,699,- 
858,000,  or  $30,000  per  mile.  The  interest  paid  on 
the  bonds  was  $245,250,000  or  4.12  per  cent.  This 
great  class  of  investment  securities  is  composed  of 


334  BANKING,  CREDIT  AND  FINANCE 

various  kinds.  We  have  not  only  first,  second,  and 
third  mortgage  bonds,  but  consolidated  mortgage 
bonds,  inoome  bonds,  convertible  bonds,  terminal 
bonds,  collateral  trust  bonds,  equipment  bonds,  etc. 

Among  such  a  mass  and  variety  as  I  have  men- 
tioned there  are  many  of  inferior  quality,  and  some 
of  even  worthless  character.  The  chief  guide  for  the 
investor  is  in  the  earning  capacity  of  the  road,  and 
reliable  information  on  that  point  is  easy  to  obtain. 
If  the  road's  net  earnings  are  at  least  twice  its  bonded 
debt  charges,  and  if  the  road  is  well  kept  up  so  that 
such  earnings  are  likely  to  continue,  the  bond  may  be 
'considered  satisfactory  in  that  respect. 

There  is  no  difficulty  in  procuring  good  railroad 
bonds  as  an  investment,  if  the  investor  confines  him- 
self to  the  issues  of  well-established  roads,  and  is 
content  with  a  return  of  4  per  cent  or  a  little  less.  It 
is  when  the  bonds  of  new  railway  projects  are  offered 
that  caution  is  necessary. 

It  is  a  well-recognized  principle  in  railway  building 
that  the  road  should  be  made  not  only  to  pay  for  its 
cost,  but  to  yield  a  profit  to  the  projectors  besides. 
In  other  words,  there  is  usually  some  *Svater"  in 
the  first  issue  of  bonds — to  say  nothing  of  the  stock. 
The  squeezing  out  of  the  water  in  times  past  has 
frequently  been  an  expensive  operation  for  the  bond 
holders.  The  appointment  of  a  receiver,  the  discredit- 
ing of  the  securities,  the  purchase  of  them  by  **  in- 
siders" at  a  heavy  discount,  the  *' reorganization" 
of  the  road,  or  the  sale  of  it  to  a  large  system,  and  the 
final  happy  outcome  for  said  *' insiders,"  is  a  process 
with  which  the  student  of  railroad  history  is  famil- 
iar. 


INVESTMENTS  335 

Nor  have  cases  of  actual  fraud  in  this  line  of  opera- 
tion been  wanting.  Sometimes  they  break  ground 
for  a  railroad  with  great  ceremony.  Then  they  pro- 
ceed to  break  the  shareholders  without  any  cer- 
emony. 

A  railway  campaign  in  Arkansas  built  only  forty- 
eight  miles  of  its  projected  road,  but  its  promoters 
succeeded  in  floating  $5,000,000  in  bonds  of  one  kind 
or  another  on  it.  The  road  was  so  poorly  built  (what 
there  was  of  it)  that  it  was  almost  worthless.  When  it 
was  sold  by  the  receiver  at  public  auction,  it  brought 
the  sum  of  $40,000,  and  even  that  was  paid  to  the 
receiver  in  his  own  receiver's  certificates,  which  had 
been  bought  at  a  discount.  Such  cases  sufficiently 
illustrate  the  kind  of  dangers  to  be  avoided  in  this 
class  of  securities.  Our  railroads  at  present,  how- 
ever, are  in  better  condition  than  ever  before.  As  a 
rule,  they  are  properties  of  enormous  value  and  pro- 
ductive power,  and  no  better  securities,  as  a  whole, 
can  be  had  than  properly  selected  railroad  bonds. 

§  369.  Public  Utility  Bonds. — Another  large  and 
rapidly  growing  class  of  bonds  is  composed  of  the 
issues  of  corporations  operating  public  utilities,  such 
as  street  railways,  telephones,  gas  and  electric-light 
plants,  etc.  Those  offered  in  the  market,  however, 
are  frequently  new  and  based  on  properties  in  course 
of  construction.  They  are  disposed  of  on  "  estunated 
earnings  and  well-written  prospectuses.  In  such 
cases  investors  should  never  forget  that,  as  a  rule, 
all  the  risk  of  the  enterprise  is  put  upon  the  bond 
buyers.  If  it  turns  out  a  success,  their  investment 
will  be  good  and  they  will  get  their  5  per  cent,  per 


336  BANKING,  CREDIT  AND  FINANCE 

annum.  All  the  rest  of  the  "estimated"  profits  that 
illmnine  the  pages  of  the  prospectus — be  they  ever 
so  large — will  go  to  the  promoters  of  the  scheme, 
who,  as  a  rule,  have  put  in  no  money  of  their  own. 

If  it  turns  out  a  failiu-e,  the  bondholders  will  be 
the  only  losers.  This  division  of  profit  and  risk  does 
not  seem  quite  equitable,  but  it  is  astonishing  how 
ready  many  people  are  to  accept  it.  The  moral  is 
plain:  Never  invest  your  money  in  the  bonds  of  any 
such  enterprise  until  it  is  completed  and  can  show 
actual  net  earnings  of  not  less  than  twice  the  amount 
required  to  pay  the  interest  on  its  bonds. 

Many  of  these  enterprises  are  legitimate  and  prof- 
itable, and  offer  good  securities  for  their  bonds.  But 
it  is  tune  enough  to  buy  the  securities  after  their 
safety  has  been  demonstrated  by  actual  experience. 
This  is  a  good  rule,  indeed,  in  regard  to  any  invest- 
ment. 

§  370.  Waterworks  Bonds. — There  is  another 
class  of  bonds  somewhat  similar  to  those  last  men- 
tioned^waterworks  bonds.  The  provision  of  law, 
before  alluded  to,  limiting  the  borrowing  power  of 
municipalities  to  5  per  cent  of  their  assessed  prop- 
erty value,  prevents  many  towns  from  owning  their 
own  waterworks.  The  plan  usually  adopted  is  to 
form  a  corporation  to  which  an  exclusive  franchise 
is  granted  to  build  waterworks..  A  contract  is  then 
entered  into  between  the  municipality  and  the  water 
company,  by  which  the  latter  undertakes  to  supply 
the  former  with  a  certain  number  of  hydrants  for  fire 
protection,  etc.,  for  a  certain  smn  per  annum.  This 
annual  payment  is  then  used  to  form  a  sinking  fund 


INVESTMENTS  387 

for  the  retirement  of  the  bonds  issued  to  cover  the 
cost  of  the  waterworks.  The  company  has  also  the 
right  to  sell  water  to  the  inhabitants,  and  the  enter- 
prise is  frequently  a  profitable  one,  forming  a  safe 
basis  for  the  issue  of  bonds.  As  usual,  however,  there 
are  numerous  dangers  to  be  avoided,  and  possible 
losses  to  be  feared. 

One  of  these  is  that  the  water  supply  may  not 
prove  sufficient.  Another  is  that  the  construction  of 
the  works  may  be  cheap  andnot  last  as  long  as  the  life 
of  the  bonds.  Still  another  danger  is  that  the  munic- 
ipality cannot  be  bound  by  its  contract  longer  than 
the  life  of  the  council  which  made  it.  A  succeeding 
council  may  reduce  the  price  paid  for  the  hydrants. 
The  greatest  danger  of  all  is  that  the  company  may 
get  into  a  fight  with  the  city;  that  the  citizens  may 
claim  that  the  water  is  impure,  and  that  as  a  result 
the  waterworks  may  be  abandoned  and  another  water 
supply  adopted.  In  Duluth  such  a  fight  was'brought 
about  by  an  epidemic  of  typhoid  fever.  When  the 
fight  began,  the  water  company's  bonds  were  con- 
sidered a  first-class  investment,  and  its  stock  was 
very  valuable.  When  it  ended,  the  bondholders  got 
seventy  cents  on  the  dollar  and  the  stockholders 
nothing. 

We  might  go  on  discussing  miscellaneous  bonds, 
but  it  is  not  necessary.  Enough  has  been  said  to 
indicate  the  dangers  to  be  guarded  against,  and  to 
show  that  careful  investigation  before  buying  is  a 
necessity;  for  while  there  are  good,  safe  investments 
offered  in  all  classes  of  bonds,  it  is  easy  to  lose  money. 


338  BANKING,  CREDIT  AND  FINANCE 

IV.— Stocks. 

.  §  371.  Bonds  and  Stocks. — The  great  difference 
between  bonds  and  stocks  is  that,  while  the  former 
are  a  lien  on  property  of  one  kind  or  another,  the 
latter  frequently  represent  nothing  more  tangible 
than  earning  capacity,  good-will,  and  the  hope  of  the 
future.  These  are  sometimes  assets  of  great,  but 
always  uncertain,  value.  As  a  rule,  it  is  the  hope  of 
a  rise  in  value  which  leads  investors  to  purchase 
stocks,  and  this  brings  a  speculative  element  into  the 
transaction.  Of  course,  stocks  are  not  all  equally 
speculative.  Bank  stocks,  for  example,  with  their 
sworn,  published  statements,  and  the  safeguard  of 
government  inspection,  are  not  to  be  classed  with 
mining  stocks,  about  which  nothing  published  is  ever 
true,  and  of  which  no  inspection  is  ever  disinterested. 

Another  vital  difference  between  bonds  and  stocks 
is  that  the  former  is  a  promise  to  pay  both  principal 
and  interest,  which  can  be  enforced  by  law,  whereas 
stock  promises  nothing.  In  other  words,  the  holder 
of  a  bond  becomes  a  creditor  of  the  makers  of  the 
bond,  whereas  the  holder  of  stock  becomes  a  part  of 
the  company  issuing  it,  and  to  that  extent  a  debtor 
for  all  the  liabilities  of  the  company.  In  some  cases 
(notably  in  bank  stocks)  the  holder  of  the  stock  is 
liable  for  as  much  again  as  the  face  amount  of  the 
stock. 

§  372.  Railway  Stocks. — Among  stocks  railways 
form  the  largest  and  most  popular  class.  The  total 
amount  of  them  is  slightly  greater  than  that  of  rail- 
road bonds,  namely  $5,742,000,000  in  a  recent  year. 


INVESTMENTS  339 

while  the  dividends  paid  amounted  to  $109,000,000, 
or  1.90  per  cent.  In  such  a  vast  total  there  is,  of 
course,  great  variety,  grading  all  the  way  from  first- 
class  to  worthless.  Most  of  them  are  listed  on  the 
New  York  Stock  Exchange — a  fact  which  has  both 
advantages  and  disadvantages  from  an  investment 
standpoint.  The  chief  advantage  is  that  they  can  be 
readily  sold,  but  this  is  outweighed  by  the  fact  that 
they  can  be  as  readily  manipulated  for  stock  jobbing 
purposes.  As  a  class,  they  cannot  be  recommended 
to  investors  who  desire  something  that  they  can  "go 
to  sleep  on.'^  They  require  constant  and  intelligent 
watching,  and  only  those  who  are  capable  of  giving 
that  to  them  should  put  their  money  into  them. 

§  373.  Industrial  and  "Trust"  Stocks.— Another 
large  class  of  stocks  which  has  come  into  special 
prominence  in  the  last  few  years  is  that  known  as 
industrials,  which  are  chiefly  the  preferred  and  com- 
mon stocks  of  the  large  corporations  commonly 
called  "trusts."  The  extravagant  way  in  which 
most  of  these  combinations  have  been  capitalized  has 
filled  many  conservative  minds  with  vague  forebod- 
ings of  coming  disaster — ^moral,  financial,  and  na- 
tional— as  the  final  outcome  of  the  movement.  But 
we  should  not  confound  the  manner  of  doing  a  thing 
with  the  thing  itself.  We  may  admit  that  the  pro- 
moter's profit  has  been  the  chief  motive  in  most  of 
the  combinations,  that  capitalization  has  been  ex- 
travagant, that  speculation  has  been  overstimulated, 
and  that  gi'eat  danger  exists  in  the  fact  that  the  cau- 
tion which  should  control  the  investor  has  already 
given  place  to  the  craze  for  large  and  quick  returns. 
But  the  movement  itself  will  outlive  these  accom- 


340  BANKING,  CREDIT  AND  FINANCE 

paniments,  if  it  is  economically  sound,  and  if  it  leads 
to  the  greater  and  easier  production  of  wealth. 

The  so-called  trusts  are  probably  here  to  stay.  The 
college  presidents  may  rage  and  the  politicians  im- 
agine a  vain  thing,  but  no  law  can  be  formed  which 
will  make  it  a  crime  for  any  number  of  people  to 
combine  their  capital  and  ability  in  any  legitimate 
business.  Laws  have  been  and  should  be  enacted  for 
the  regulation  of  the  combinations,  for  greater  safe- 
guards to  the  investing  public,  and  for  the  protection 
of  competing  smaller  concerns  against  monopoly. 

Compulsory  publicity  of  the  condition  of  the  cor- 
porations will  go  a  long  way  in  the  right  direction; 
but  all  talk  of  stopping  the  movement  is  vain.  It  is 
clearly  an  economical  evolution  from  the  evils  of  ex- 
cessive competition,  and  much  can  be  said  in  its 
favor.  Its  tendency  is  toward  economy  of  produc- 
tion by  the  saving  of  all  wasteful  and  imnecessary 
expense;  and  this  is  in  harmony  with  the  spirit  of  the 
age,  which  is  ever  improving  on  old  methods  and 
machinery.  Its  tendency  is  always  toward  a  larger 
ownership  of  the  property  represented  by  the  cor- 
poration and  a  wider  distribution  of  the  profits. 
There  are  now  thousands  of  owners  where  there  were 
but  hundreds. 

Competition  is  now  between  nations  as  well  as  in- 
dividuals. Consolidations  have  had  their  share  in 
placing  this  country  at  least  a  neck  ahead  of  our 
greatest  competitors  in  the  international  race.  How 
they  are  affected  by  hard  times  was  seen  in  the  de- 
pression of  1907-08.  A  few  great  vessels  will  always 
weather  a  storm  better  than  manv  small  craft. 


INVESTMENTS  341 

When  great  changes  are  going  on  it  is  natural  t() 
have  some  apprehension  as  to  final  results  and  eas}^ 
to  prophesy  evil.  When  Rowland  Hiirs  penny  post 
scheme  had  gained  such  support  as  to  have  its  adop- 
tion proposed  in  Parliament,  Sir  Robert  Peel,  the 
greatest  financial  minister  of  his  day,  was  its  strong- 
est opponent,  and  prophesied  nothing  but  loss  and 
failure  as  results.  All  the  great  movements  in  his- 
tory were  fiercely  opposed  by  some  of  the  ablest  men 
of  the  time  who  were  specialists  on  the  particular 
matter  in  question.  Looking  back  now,  their  opposi- 
tion seems  absurd.  And  so  when  our  theoretical 
economists  predict  disaster  from  this  movement,  we 
must  w^ait  and  see.  None  of  the  calamities  has  hap- 
pened yet. 

A  great  railroad  resembles  a  modern  trust  in  many 
respects.  It  is  generally  controlled  by  one  man,  but 
owned  by  thousands.  It  pays  its  stockholders  better, 
serves  the  public  better,  advances  national  develop- 
ment better,  and  makes  transportation  vastly  cheaper 
than  a  hundred  small  roads  could  do.  In  fact,  the 
industries  now  being  combined  into  large  corpora- 
tions are  only  following  the  examj)le  of  the  railroads. 
Of  course,  there  is  always  the  danger  that  things 
will  be  overdone  and  tendencies  carried  too  far.  But 
against  this  there  is  an  intelligent  public  scntmient 
which  will  have  to  be  reckoned  with.  The  so-called 
trusts  will  no  doubt  live;  but  they  will  live  only  by 
proving  that  their  existence  is  a  benefit  to  the  people 
and  not  a  curse.  This  they  will  probably  be  able  and 
wise  enough  to  do. 

The  field  for  investment  known  as  ''industrials,'' 
therefore,  should  not  be  passed  by  ^^ith  a  timid  epi- 


342  BANKING,  CREDIT  AND  FINANCE 

gram,  but  is  fairly  entitled  to  consideration.  Here, 
even  more  than  elsewhere,  investigation  of  the  facts, 
guided  by  common-sense,  is  a  necessity.  The  com- 
mon stocks  composed  entirely  of  water  and  given 
away  as  a  bonus  to  help  sell  the  preferred  cannot  be 
classed  as  investments  and  many  of  these  preferred 
stocks  represent  such  extravagant  capitalization 
that  they  also  should  be  avoided.  But  for  investors 
capable  of  intelligent  investigation  before,  and  super- 
vision after,  purchasing  their  investments  some  of  the 
preferred  industrials  offer  a  legitimate  and  profitable 
opportunity. 

Take  the  case  of  a  large  company  whose  products 
are  used  in  every  household  of  the  land.  It  is  pro- 
vided with  sufficient  working  capital  so  that  it  is 
never  a  borrower,  and  it  has  no  bonds,  except  a  small 
amount  existing  on  some  of  the  plants  before  they 
were  acquired,  which  cannot  be  paid  until  they  ma- 
ture. It  has  earned  dividends  on  its  preferred  and 
common  stock  from  the  beginning,  and  is  piling  up  a 
good  reserve  fund  besides.  It  has  a  staple  business 
and  is  excellently  managed.  One  fails  to  see,  there- 
fore, why  its  preferred  stock,  or  the  preferred  stock 
of  any  other  "industrial"  in  like  circumstances,  is 
not  a  safe  and  legitimate  investment  for  a  business 
man  capable  of  keeping  an  intelligent  supervision 
of  his  affairs. 

§'  374.  Miscellaneous  Stocks. — ^In  addition  to  these 
great  classes  there  are  miscellaneous  stocks  too 
numerous  to  be  here  discussed.  With  regard  to  them 
as  to  all  other  securities,  few  general  rules  for  insur- 
ing safety  can  be  stated.    The  object  in  this  discus- 


INVESTMENTS  343 

sion  has  been  simply  to  hint  at  the  dangers  to  bo 
avoided,  and  to  suggest  the  lines  of  investigation  to 
be  followed  in  buying  the  common  securities  which 
our  market  offers. 

§  375.  A  Safe  General  Rule.— It  may  be  said,  hoNv- 
ever,  that  the  safest  general  rule  is  to  be  content 
with  a  moderate  rate  of  interest.  From  3%  to  5  per 
cent  is  all  that  can  now  be  looked  for  in  securities 
which  will  require  no  watching  on  the  part  of  the 
holder.  One  per  cent  more  return  on  an  investment 
usually  means  at  least  10  per  cent  more  risk  of  los- 
ing the  principal.  The  days  of  large  returns  on  se- 
curities offered  to  the  general  public  are  over,  and 
all  flaming  advertisements  or  well-written  circulars 
which  promise  high  rates  of  interest  should  be  passed 
by  as  little  better  than  frauds. 

An  investor  should  never  allow  himself  to  be 
hurried  into  buying  anj^thing  on  the  ground  that  if 
he  does  not  buy  at  once  the  opportunity  will  be  gone. 
He  should  take  time  to  see  the  property  or  to  read 
the  document.  This  may  save  him  much  tune,  worr}% 
and  loss.  It  is  wise  not  to  put  too  many  eggs  into  one 
basket,  and  not  to  buy  when  everyone  else  seems  to 
be  buying  the  same  thing.  Above  all,  he  should  never 
expect  something  for  nothing.  Anything  that  can  be 
got  for  nothing  in  the  business  world  is  pretty  sure 
to  be  worth  nothing,  but  to  cost  something  in  the  end. 

The  rate  of  interest  on  investments  has  been 
steadily  declining  for  many  years,  but  is  now  prob- 
ably as  low  at  it  is  likely  to  go  for  many  years  to  come. 
We  are  only  beginning  to  realize  the  tremendous 
resources  of  our  country,  and  until  they  have  been 


344  BANKING,  CREDIT  AND  FINANCE 

fully  developed,  capital  will  continue  to  bring  fair 
returns. 


Questions  for  Review,  Chapter  XVI. 

1.  Can  all  business  enterprises  be  regarded  as  invest- 
ments?  If  not,  why  not? 

2.  What  is  the  more  restricted  meaning  of  investments 
in  common  use? 

3.  From  what  sources  are  funds  obtained  to  pay  for 
new  issues  of  securities? 

4.  Can  bank  deposits  properly  be  considered  as  "money 
in  the  bank"?    If  not,  why  not? 

5.  "What  percentage  of  all  business  transactions  is  done 
vm  credit? 

6.  I^ow  can  credit  be  defined? 

7.  What  has  been  the  effect  of  the  remarkable  expansion 
of  credit  in  the  United  States  during  the  past  few  years? 

8.  Upon  what  does  the  price  and  salability  of  securities 
d>epend  ? 

9.  What  is  the  general  effect  of  public  confidence  on 
the  stock  and"  bond  market  ? 

10.  Name  some  of  the  sources  of  funds  available  for 
investment. 

11.  "What  constitutes  desirability  in  any  investment? 

12.  Into  how  many  divisions  may  the  different  kinds  of 
investments  offered  in  the  United  States  be  grouped? 

13.  How  are  government  bonds  chiefly  held? 

14.  Upon  what  does  the  payment  of  state  bonds  depend  ? 

15.  Can  states  and  municipalities  be  forced  to  pay  their 
bonds  through  the  courts? 

16.  What  is  the  distinction  between  speculation  and  in- 
vestment in  the  purchase  of  real  estate? 


INVESTMENTS  345 

17.  Is  improved  property  always  satisfactory  as  an  in- 
vestment ? 

18.  What  should  an  investor  in  a  real  estate  mortgage 
ascertain  before  parting  with  his  money? 

19.  Are  farm  mortgages  a  desirable  fonn  of  real  estate 
investment  ? 

20.  What  is  the  chief  guide  for  an  investor  in  railroad 
bonds  ? 

21.  What  rule  is  it  desirable  to  observe  in  regard  to  the 
purchase  of  public  utility  bonds? 

22.  What   is   the   great   difference   between   bonds  and 
stocks? 


CHAPTER  XVII 

The  Stock  Exchange. 

Section  376.  Economic  Value. — The  general  pub- 
lic too  often  regard  the  stock  exchange  merely  as  a 
noisy  congregation  of  brokers  who  gamble  in  the 
securities  of  government  and  corporations,  under 
the  guise  of  legitimate  business.  A  deeper  insight, 
however,  into  the  character  and  functions  of  these  in- 
stitutions will  show  the  important  part  which  they 
play  in  the  financial  mechanism  of  the  country. 

The  exchanges  of  the  world  are  instruments  of 
enormous  economic  value  in  subdividing  and  dis- 
tributing capital  and  in  directing  its  employment  in 
great  commercial  and  industrial  enterprises.  When 
the  Wall  street  man  goes  down  to  his  olfice  his  first 
inquiry  is  for  the  two-o'clock  prices  on  the  stock 
exchange  of  London,  which  are  received  before  ten 
o'clock  in  New  York.  The  quotations  of  American 
stocks,  with  the  accompanying  price  of  consols  and 
the  Bank  of  England  rate  give  him  the  financial  con- 
dition abroad  translated  into  figures  by  the  keenest 
financiers. 

New  York  has  no  more  entertaining  public  ex- 
hibition than  its  Stock  Exchange.  The  visitor  who, 
for  the  first  time,  looks  down  from  a  gallery  upon 

346 


THE  STOCK  EXCHANGE  347 

its  members  in  the  act  of  transacting  business,  is 
astonished  at  the  turmoil  and  confusion  he  witnesses. 

§  377.  Business  on  the  Exchange. — There  is  no 
reason  why  bonds  and  shares  should  not  be  publicl}' 
dealt  in,  and  in  large  quantities,  as  well  as  dry  goods, 
corn,  or  cotton.  But,  unfortunately,  few  stock  ex- 
changes confine  their  transactions  to  ordinary 
legitimate  business. 

The  members  are  divided  into  two  classes — those 
who  execute  commission  for  others,  and  those  who 
deal  on  their  ow^n  account.  Among  the  latter  are 
the  boldest  and  sharpest  speculators  of  the  day.  You 
will  look  in  vain  in  the  quotations  for  the  stock  of 
dozens  of  corporations  whose  securities  are  among 
the  choicest  investments.  It  is  upon  fluctuations 
that  stock  speculation  grows  strong,  and  the  larg- 
est profits  are  often  made  on  the  poorest  stocks. 

In  London,  Paris,  Berlin,  and  New  York  there 
are  very  large  private  banking  institutions  which 
buy  and  sell  bonds  and  stocks  on  the  stock  exchanges 
of  the  world  on  commission.  These  great  financial 
institutions  negotiate  loans  for  governments  and 
great  corporations  and  are  the  intermediaries  in  all 
the  great  movements  of  capital  from  one  country  to 
another. 

§  378.  The  London  Exchange. — The  London  Stock 
Exchange  has  scarcely  more  than  one  hundred  years 
of  history.  In  the  early  part  of  the  19th  century  the 
elder  Rothschild  was  one  of  the  giants  ''on'  Change," 
and  it  was  in  this  business  that  he  amassed  the  great 
fortune  which  makes  the  name  of  his  house  sjmony- 
mous  with  money  power.   The  Exchange  occupies  an 


348  BANKING,  CREDIT  AND  FINANCE 

old  dingy  building  on  Capel  Court  close  to  tlie  Bank 
of  England.  The  membership  is  not  limited  to  a 
fixed  number,  as  in  Paris  and  New  York. 

One  of  the  marked  peculiarities  of  the  Stock  Ex- 
change of  London  is  the  distinction  between  those 
who  act  as  agents  for  the  public,  and  who  are  prop- 
erly called  brokers,  and  those  who  do  business  on 
their  own  account  and  are  described  as  dealers  or 
jobbers.  On  the  Paris  Bourse  all  agents  are  strictly 
forbidden  to  trade  on  their  own  account.  The  New 
York  members  who  operate  on  their  own  account  are 
called  room-traders  or  scalpers,  whose  profits  or 
losses  consist  in  quick  turns  made  during  the  day. 
They  endeavor  to  detect  immediate  monetary  influ- 
ences without  considering  the  ultimate  tendency  of 
prices. 

§  379.  Listing  of  Stock. — Nominally  the  stock 
exchanges  guard  the  public  interest  in  declining  to 
admit  to  their  regular  quotations  the  stock  of  ques- 
tionable enterprises.  Before  any  shares,  bonds,  or 
debentures  can  be  quoted  in  the  official  lists,  appli- 
cation must  be  made  in  behalf  of  such  issues  and 
their  bona  fide  character  must  be  established. 

The  membership  of  the  New  York  Exchange  is 
limited  to  about  1,100  and  seats  becoming  vacant  by 
retiring  members  bring  prices  all  the  way  from 
$20,000  to  $75,000  each.  Stocks  and  bonds  sold  in  the 
regular  way  are  deliverable  to  the  buyer  during 
exchange  hours  on  the  following  day.  Transactions 
are  quickly  collated  and  rapidly  reported  to  the  out- 
side world. 


THE  STOCK  EXCHANGE  S49 

In  hundred  of  offices  in  New  York  City  and  in 
other  American  cities  can  be  seen  a  little  instrumeiii 
called  a  ticker,  which  automatically  prints  abbrevi- 
ated names  of  stocks,  with  their  prices,  on  a  narrow 
ribbon  of  paper.  These  tickers  are  rented  to  these 
offices,  as  are  telephones,  by  the  local  telegraph  com- 
panies, and  as  fast  as  the  sales  are  made  the  quota- 
tions are  ticked  off  in  thousands  of  offices  in  all  parts 
of  the  United  States. 

There  are  many  exchange  institutions  in  the  coun- 
try. Nearly  every  large  city  has  its  stock  exchange, 
and  scattered  in  trade  centers  are  cotton  exchanges, 
produce  exchanges,  petroleum  exchanges,  mining 
exchanges,  etc. 

The  New  York  Curb  Market,  formerly  doing  busi- 
ness literally  ''on  the  Curb"  in  close  proximity  to 
the  Stock  Exchange,  has  recently  (1921)  moved  in- 
doors and  now  occupies  a  fine  building  on  Broad 
street.  Many  stocks  of  value  that  are  not  listed  on 
the  Stock  Exchange  are  traded  in,  and  the  Curb  no^^• 
lays  claim  to  being  America's  second  largest  stock 
market. 

§  380.  Technical  Terms  of  Stock  Exchanges.— The 
term  "bull"  is  applied  to  those  who  are  purchasers 
of  stock  for  long  account,  with  the  purpose  of  ad- 
vancing prices,  as  the  tendency  of  a  bull  is  to  elevate 
everything  within  his  reach.  The  term  "bears"  is 
appUed  to  those  who  sell  stock  short,  with  the  pur- 
pose of  depreciating  values.  The  bear  operates  for  a 
decline  in  prices.  To  buy  one  stock  and  sell  another 
with  the  expectation  that  the  one  bought  will  advance 
and  the  one  sold  will  decline,  is  a  "hedge.'*    The 


350  BANKING,  CREDIT  AND  FINANCE 

broker's  charge  for  Ms  services  is  called  a  commis- 
sion, which  in  the  New  York  Stock  Exchange  is  one- 
eighth  of  one  per  cent  each  way  on  the  par  value  of 
the  security  purchased  or  sold.  A  point  means  one 
per  cent  on  the  par  value  of  a  stock  bond. 

Stock  privileges  or  puts  and  calls  are  extensively 
dealt  in  abroad  and  to  some  extent  here.  A  "put" 
is  an  agreement  in  the  form  of  a  written  or  printed 
contract  filled  out  to  suit  the  case,  whereby  the  signer 
of  it  agrees  to  accept  upon  one  day's  notice,  except  on 
the  day  of  expiration,  a  certain  number  of  shares  of 
a  given  stock  at  a  stipulated  price.  A  "call"  is  the 
reverse  of  a  put,  giving  its  owner  the  right  to  de- 
mand the  stock  under  the  same  conditions.  A  put 
may  serve  as  an  insurance  to  an  investor  against  a 
radical  decline  in  the  value  of  stock  he  owns;  a  call 
may  be  purchased  by  a  man  whose  property  is  not 
immediately  available,  but  who  may  desire  tobeplaced 
in  a  position  to  procure  the  shares  at  the  call  price, 
if  they  are  not  below  that  in  the  open  market  when 
he  secures  the  necessary  funds. 

The  speculator  usually  trades  on  margins.  If  he 
has  $500  to  invest  he  buys  $5,000  worth  of  stock,  his 
$500  being  ten  per  cent  of  the  total  amount.  He 
expects  to  sell  again  before  the  remaining  amount 
falls  due.  The  margin  is  usually  placed  by  the  specu- 
lator in  the  hands  of  a  broker  as  a  guaranty  against 
loss.  Although  these  brokers  are  really  agents  for 
others,  yet  on  'Change  they  stand  in  the  mutual  rela- 
tionship of  principals.  A  "margin"  is  merely  a  par- 
tial payment,  but  a  broker  buying  stock  for  a  client 
on  margin  is  compelled  to  wholly  pay  for  it.  If  he  has 


THE  STOCK  EXCHANGE  351 

not  the  necessary  capital  his  usual  custom  is  to  bor- 
row from  banks  or  money-lenders,  pledging  the  stock 
as  collateral  security. 

On  foreign  exchanges  the  element  of  credit  enters 
more  largely  into  the  conduct  of  business.  Where 
the  credit  of  the  client  in  London  is  established,  his 
broker  does  not,  ordinarily,  call  on  him  for  any  cash 
until  the  next  "settlement  day." 

There  are  a  variety  of  methods  of  securing  what  is 
called  a  corner,  that  is,  a  controlling  interest  in  mar- 
ketable stocks  which  others  are  compelled,  owing  to 
previously  made  contracts,  to  buy. 

A  ''syndicate"  is  a  party  of  capitalists  who  unite 
their  resources  to  accomplish  some  financial  object, 
such  as  the  purchase  of  a  property,  a  public  loan,  an 
issue  of  bonds  or  stocks,  or  any  other  undertaking 
requiring  large  capital. 

A  ''pool"  is  in  some  respects  similar  to  a  syndicate. 
The  funds  of  individuals  are  put  into  a  common  un- 
dertaking with  a  view  of  manipulating  particular 
securities  and  dividing  the  profits.  It  savors  of 
speculation  if  not  of  gambling. 

A  "boom"  is  an  expansion  of  credit  and  a  large  in- 
flation of  value.  A  "panic"  is  an  unusual  fright 
among  speculators  which  reduces  prices  and  causes  a 
general  collapse  of  credit.  A  small  boom  is  called  a 
"flurry." 

The  rules  of  the  exchanges  of  New  York  forbid 
trading  after  closing  hours,  but  in  times  of  great 
financial  excitement  business  overflows  into  the 
streets  and  hotels  and  is  called  trading  "on  the 


352  BANKING,  CREDIT  AND  FINANCE 

curb."  A  "wash  sale"  is  a  fictitious  transaction 
made  by  two  members  acting  in  collusion,  for  the 
purpose  of  swelling  the  volume  of  apparent  busi- 
ness in  a  security,  and  thus  giving  a  false  impression 
of  its  value. 

Stocks  sell  "dividend-on"  between  the  time  the 
dividend  is  declared  and  the  day  the  books  of  the 
company  close  for  transfer;  after  that  they  sell  ex- 
dividend,  in  which  case  the  dividend  does  not  go  to 
the  buyer.  When  a  company  decides  not  to  declare 
a  dividend  it  is  said  to  "pass  its  dividend." 

To  sell  stock  "buyer  3"  is  to  give  the  buyer  the 
privilege  of  taking  it  on  the  day  of  purchase,  or  on 
any  of  the  three  following  days,  without  interest;  and 
to  sell  stock  "seller  3"  is  to  give  the  seller  the  priv- 
ilege of  delivering  it  on  the  day  of  purchase,  or  on 
any  one  of  the  three  following  days,  without  interest. 
Buyer  3  is  a  little  lower,  and  seller  3  a  little  higher 
than  "regular  Avay"  when  the  market  is  in  a  normal 
condition. 

"Bucket-shops"  are  establishments  conducted 
nominally  for  the  transaction  of  a  stock-exchange 
business,  but  really  for  the  registration  of  bets  or 
wagers,  usually  for  small  amounts,  on  the  rise  or  fall 
of  the  prices  of  stocks,  there  being  no  transfer  or  de- 
livery of  the  commodities  nominally  dealt  in.  There 
were  formerly  thousands  of  these  counterfeit  con- 
cerns throughout  the  coimtry,  conducted  without 
any  regard  for  legitimate  commercial  enterprises. 

§  381.  "Brokers." — Brokers  are  persons  employed 
as  middlemen  to  transact  business  or  negotiate  bar- 
gains between  merchants  or  individuals.    There  are 


THE  STOCK  EXCHANGE  353 

bill  or  exchange  brokers  who  buy  and  sell  foreign 
bills;  note  brokers  who  deal  in  promissory  notes; 
stock  brokers  who  buy  and  sell  stocks  for  others, 
ship  brokers  who  buy  and  sell  cargoes  in  transit  or 
upon  arrival;  insurance  brokers  who  are  middlemen 
betw'een  the  insurance  companies  and  the  insured; 
custom  house  brokers  w^ho  act  for  merchants  in  get- 
ting consignments  through  the  custom  house;  and 
brokers  in  cattle,  in  dry  goods,  in  coffee,  in  cotton,  in 
drugs,  in  flour,  in  grain,  in  hides,  in  oil,  in  real  estate, 
in  sugar,  in  tobacco,  in  wool;  in  everything  or  any- 
thing that  is  bought  or  sold  in  large  quantities. 

By  attending  to  one  class  of  business  constantly 
brokers  acquire  a  more  intimate  knowledge  of  its 
various  details,  of  the  houses  from  which  to  buy,  of 
the  best  market  for  sales,  and  of  the  credit  of  those 
engaged  in  it,  than  could  possibly  be  expected  of  a 
general  merchant. 

The  large  manufacturers  living  outside  of  the 
great  centers  find  it  to  their  advantage  to  engage 
brokers  to  buy  their  raw  material  for  them,  so  we 
find  that  each  broker  has  his  regular  customers,  and 
for  a  small  commission  he  goes  into  the  market  and 
buys  or  sells  as  carefully  as  though  he  were  spend- 
ing his  ow^n  money.  It  is  for  these  reasons — from  a 
sense  of  the  advantages  to  be  derived  from  using 
brokers  in  the  transaction  of  business — that  they  are 
so  extensively  employed  in  New  York,  Chicago,  Lon- 
don, and  other  great  cities. 

In  France  the  brokers  are  called  ''agents  de 
change."  and  their  number  in  Paris  is  limited  to 
sixty.     They  are  severally  obliged  to  give  bonds 


354  BANKING,  CREDIT  AND  FINANCE 

for  the  prevention  of  abuses,  and  are  not  al- 
lowed to  charge  more  than  a  fixed  rate  of  commis- 
sion. 

§  382.  Stock  Companies. — To  organize  a  stock 
company  it  is  necessary  for  a  number  of  persons  to 
come  together  and  make  a  certificate  to  the  effect 
that  they  propose  to  form  a  company  to  bear  a  cer- 
tain name,  for  the  purpose  of  transacting  a  certain 
kind  of  business  at  a  certain  place.  The  certificate 
states  that  they  propose  to  issue  a  certain  number 
of  shares  of  stock  at  a  certain  price  per  share,  that 
the  capital  stock  is  to  be  a  certain  amount,  and  that 
the  company  is  to  continue  to  exist  for  a  definite 
period  of  time.  Blank  forms  for  such  certificates 
are  supplied  by  the  secretary  of  the  state  where  the 
company  is  being  organized  and  when  properly  filled 
out,  signed,  and  delivered  to  him,  he  issues  a  license 
or  charter  to  the  persons  making  such  certificate, 
giving  them  permission  to  open  books,  sell  stock,  and 
carry  on  the  enterprise  outlined.  State  laws  regard- 
ing stock  companies  differ  very  largely. 

§  383.  Shares  of  Stock. — The  usual  par  value  of 
a  share  of  stock  is  $100.  That  is,  if  a  company  or- 
ganize with  a  capital  of  $50,000,  they  will  have  500 
shares  to  sell.  Each  person  who  buys  or  subscribes 
for  the  stock,  that  is,  who  joins  the  company,  receives 
a  certificate  of  stock.  These  certificates  are  trans- 
ferable at  the  pleasure  of  the  owners.  The  transfer 
is  made  by  a  form  of  indorsement  on  the  back  of  the 
certificate. 

The  men  subscribing  in  this  way  become  resjwnsi- 
ble  for  the  good  management  of  the  business,  and  are 


THE  STOCK  EXCHANGE  855 

obliged  to  act  according  to  the  laws  of  the  state  in 
which  the  company  is  organized.  Usually  they  are 
responsible  individually  for  the  liabilities  if  the  con- 
cern should  become  bankrupt. 

Every  person  who  subscribes  owns  a  part  of  the 
business  and  is  called  a  shareholder.  All  the  share- 
holders must  meet  together,  and  out  of  their  number 
they  choose  a  certain  number  of  directors.  The  di- 
rectors choose  a  president  and  other  necessary  ofl&cers 
and  fix  the  amount  of  salary  which  shall  be  paid  such 
officers  for  their  work.  As  a  rule  directors  have  no 
salaries  attached  to  their  positions.  A  regular  meet- 
ing of  all  the  shareholders  is  held  at  least  once  a  year 
to  elect  the  directors  and  hear  the  reports  of  the 
officers.  It  is  necessary  to  file  a  statement  of  re- 
sources and  liabilities  each  year  with  the  secretary 
of  state.  Corporations  are  now  also  required  to  file 
a  statement  of  their  affairs  with  the  collectors  of  in- 
ternal revenue. 

The  capital  stock  of  a  concern  may  be  increased  or 
diminished  by  a  vote  of  the  majority  of  the  stock- 
holders representing  a  majority  of  the  stock. 

§  384.  Preferred  Stock. — The  preferred  stock  of 
a  corporation  is  given  to  secure  some  obligation  of 
the  company  and  upon  it  dividends  are  declared  in 
preference  to  common  stock.  That  is  to  say,  if  a 
man  holds  a  share  of  preferred  stock  he  will  receive 
interest  thereon  out  of  the  profits  of  the  business  be- 
fore such  profits  are  given  in  the  form  of  dividends 
to  shareholders  generally. 

§  385.  Dividends.— The  directors  of  a  company 
after  paying  the  expenses  and  laying  by  a  certain 


356  BANKING,  CREDIT  AND  FINANCE 

amount  for  contingencies,  divide  the  profits  among 
the  shareholders.  These  profits  are  called  dividends, 
and  in  well  managed  companies  the  dividends  which 
are  declared  quarterly,  semi-annually,  or  annually 
usually  amount  to  good  interest  on  the  shareholder's 
investment. 

g  386.  Surplus  Fund. — It  is  not  customary  to 
pay  a  larger  dividend  than  good  interest  on  the  in- 
vestment. In  some  states  some  classes  of  corpora- 
tions are  not  permitted  to  declare  dividends  larger 
than  a  fixed  amount.  The  profits  remaining  after 
expenses  and  dividends  are  paid  are  credited  to  what 
is  called  a  surplus  fund.  This  fund  is  the  property  of 
the  shareholders  and  is  usually  invested  in  good 
securities. 

§  387.  Treasury  Stock. — It  often  occurs  that  a 
new  company  finds  it  necessary  to  set  aside  a  certain 
number  of  shares  to  be  sold  from  time  to  time  to  se- 
cure working  capital.  Such  stock  is  held  in  the 
treasury  until  it  is  needed  and  is  called  treasury 
stock. 

When  a  stock  is  issued,  upon  which  a  certain  divi- 
dend is  guaranteed  it  is  called  guaranteed  stock. 

§  388.  Watered  Stock. — ^When  stock  is  issued  to 
the  stockholders  without  increase  of  actual  capital 
the  stock  is  said  to  have  been  ''watered."  A  com- 
pany may  organize  for  say  $5,000  and  may  want  to 
increase  to  $50,000  without  adding  to  the  number  of 
its  shareholders.  Each  holder  of  one  share  will  in 
this  instance  receive  nine  new  shares,  and  in  future 
instead  of  receiving  a  dividend  on  one  share  he  will 
receive  a  dividend  on  ten  shares. 


THE  STOCK  EXCHANGE  367 

§  389.  Limited  Liability  Companies.— When  the 
word  Limited  is  affixed  to  a  stock  company 's  name, 
it  signifies  that  each  shareholder  is  individually  lia- 
ble to  the  creditors  of  the  company  for  only  the 
amount  representing  the  value  of  the  shares  held  by 
him  or  the  stock  for  which  he  has  subscribed.  Un- 
derstand clearly  that  the  word  Limited  printed  after 
the  name  of  a  company,  and  which  is  required  there 
by  law  in  some  States  does  not  indicate  in  any  way 
that  the  capital  or  credit  of  the  company  is  limited. 
It  merely  differentiates  the  liability  of  the  stock- 
holders from  that  of  partners  in  a  concern. 

§  390.  Sale  of  Stock. — Stock  is  usually  sold  on 
certain  explicit  conditions,  such  as  the  paying  of  ten 
per  cent  down  and  the  balance  at  stated  intervals. 
If  the  conditions  which  are  agreed  to  by  the  share- 
holders are  not  met  his  stock  is  declared  forfeited, 
or  he  can  be  sued  in  the  same  manner  as  upon  any 
other  contract.  Some  companies  organize  with  the 
understanding  that  a  certain  percentage  of  the  nom- 
inal value  of  the  shares  is  to-  be  paid  at  the  time  of 
subscribing,  and  that  future  payments  are  to  be  made 
at  such  times  and  in  such  amounts  as  the  company 
may  require.  Under  these  conditions  the  stock- 
holders are  assessed  whenever  money  is  needed  to 
pay  the  company's  expenses.  Such  assessments  are 
uniform  on  all  stockholders. 


Questions  for  Review,  Chapter  XVII. 

1.  What  is  the  economic  value  of  the  stock  exchanges 
of  the  world? 

2.  Is  there  any  reason  why  stocks  and  bonds  should 
not  be  publicly  dealt  in? 


358  BANKING,  CREDIT  AND  FINANCE 

3.  What  is  the  distinction  made  on  the  London  Stock 
Exchange  between  "brokers"  and  "dealers"? 

4.  What  are  "room  traders"  on  the  New  York  Stock 
Exchange  ? 

5.  In  what  way  are  the  stock  exchanges  supposed  to 
guard  the  public  interest? 

6.  What  are  the  meanings  of  the  terms  "bull"  and 
"bear"? 

6.  What  are  the  meanings  of  the  terms  "bull'  and  "bear"  ? 

7.  What  are  "puts"  and  "calls"? 

8.  Describe  the  method  of  speculative  trading  on  mar- 
gins. 

9.  What  is  the  distinction  commonly  drawn  between 
a  syndicate  and  a  pool? 

10.  What  is  the  advantage  to  a  manufacturer  of  engaging 
brokers  to  buy  their  raw  material  for  them? 

11.  What  is  necessary  to  organize  a  stock  company? 

12.  How  is  the  transfer  of  a  certificate  of  stock  made? 

13.  What  is  the  nature  of  the  preferred  stock  of  a  cor- 
poration ? 

14.  What  is  meant  by  treasury  stock? 

15.  What  is  the  signification  of  the  Word  "limited"  af- 
fixed to  a  stock  company's  name? 

16.  What  do  you  understand  by  the  "curb"  market? 


CHAPTER  XVIII 

Monetary  Events  Since  1786. 

1786. — Establishment  of  the  double  standard  in 
the  United  States  with  a  ratio  of  1  to  15.25;  that  is, 
on  the  basis  of  123.134  grains  of  fine  gold  for  the  half 
eagle,  or  $5  piece,  and  375.64  grains  of  fine  silver  for 
the  dollar,  without  any  actual  coinage. 

1792. — ^Adoption  of  the  ratio  of  1  to  15  and  estab- 
lishment of  a  mint  with  free  and  gratuitous  coinage 
in  the  United  States;  the  silver  dollar  equal  to  371  Vi 
grains  fine,  the  eagle  to  247^/2  grains  fine. 

1803. — ^Establishment  of  the  double  standard  in 
France  on  the  basis  of  the  ratio  of  1  to  151/2,  notwith- 
standing the  fact  that  the  market  ratio  was  then 
about  1  to  15. 

1810. — ^Introduction  of  the  silver  standard  in 
Russia  on  the  basis  of  the  ruble  of  17.99  grams  of  fine 
silver,  followed  in  1871  by  the  coinage  of  imperials, 
or  gold  pieces  of  5  rubles,  of  5.998  grams;  therefore, 
with  a  ratio  of  1  to  15.  This  ratio  was  changed  by 
the  increase  of  the  imperial  to  5  rubles  15  copecks, 
and  later  to  1  to  15.45. 

1815. — Great  depreciation  of  paper  money  in  Eng- 
land, reaching  261/^  per  cent  in  May.    Course  of  gold, 

359 


360  BANKING,  CREDIT  AND  FINANCE 

£5  6s  and  of  silver  liy^d  per  ounce  standard.  In 
December  the  loss  was  only  6  per  cent;  gold  at  this 
period  was  quoted  at  £4  3s  and  of  silver  at  64d. 

1816. — Abolition  of  the  double  standard  in  Eng- 
land, which  had  had  as  its  basis  the  ratio  of  1  to  15.21, 
and  adoption  of  the  gold  standard  on  the  basis  of 
the  pound  sterling  at  7.322  grams  fine  in  weight. 

Coinage  of  divisional  money  at  the  rate  of  66d  per 
ounce.  Extreme  prices,  £4  2s  for  gold  and  64d  for 
silver  in  January,  £3  18s  6d  and  59i4d  in  December. 

Substitution  for  the  ratio  of  1  to  15.5  in  Holland, 
established  by  a  rather  confused  coinage,  of  the  ratio 
of  1  to  15%. 

1819. — Abolition  of  forced  currency  in  England. 
Price  of  gold,  £3  17s  lOy^d  and  of  silver  62d  per  ounce 
in  October,  against  £4  Is  6d  and  67d  in  February. 
(The  price  of  silver  given  hereafter  represents  the 
average  rate  per  ounce  standard — that  is,  the  mean 
between  the  highest  price  and  the  lowest  price 
quoted  during  the  year.) 

1832. — ^Introduction  of  the  monetary  system  of 
France  in  Belgium,  Avith  a  decree  providing  for  the 
coinage  of  pieces  of  20  and  40  francs,  which,  however, 
were  not  stamped.    Silver,  59%d. 

1834. — Substitution  of  the  ratio  of  1  to  16  for  that 
of  1  to  15  in  the  United  States  by  reducing  the  weight 
of  the  eagle,  ten-dollar  gold  piece,  from  270  grains  to 
258  grains. 

In  1837  the  fineness  of  the  United  States  gold  coins 
Tvas  raised  from  .899225  to  .900,  and  the  silver  coins 
fi'om  .8924  to  .900,  giving  a  ration  of  1  to  15.988,  and 


MONETARY  EVENTS  SINCE  1786 


361 


fixing  the  standard  weight  of  the  silver  dollar  at 
4121/2  grains.     Silver,  59  ll-16d. 

1835.-Introduction  of  the  company  rupee,  a  piece 
of  silver  weighing  165  grains  fine,  in  India  in  place  of 
the  sicca  rupee.-(Creation  of  a  trade  coin-tiie  mo- 
hur,  or  piece  of  15  rupees— containing  165  ^ains  of 
fine  gold.    Silver.  59  ll-16d.  g:rains  ot 

1    ^?f^-— Abolition  of  the  double  standard  in  Hol- 
land by  the  introduction  of  the  silver  standard  on  the 
basis  of  a  1-florin  piece  .945  grams  fine,  the  coinage 
o±  winch  had  already  been  decreed  in  1839.    Silver 
59  ll-16d.  ^^iivei, 

Discovery  of  the  gold  mines  of  California. 

1848.— Coinage  in  Belgium  of  pieces  of  10  and  25 
francs  m  gold,  a  shade  too  light.  These  pieces  were 
demonetized  and  withdrawn  from  circulation  in 
1884.    Silver,  59i/od. 

Replacing  the  ratio  of  1  to  16  in  Spain,  which  had 
been  m  force  since  1786,  by  that  of  1  to  15.77. 

1850.-— Introduction  of  the  French  monetary  sys- 
tem in  Switzerland  without  anv  actual  coinage  of 
gold  pieces.    Silver,  60  l-16d. 

1851.— Discovery  of  the  gold  mines  in  Australia. 

1853.— Lowering  of  the  weight  of  silver  pieces  of 
less  value  than  $1  to  the  extent  of  7  per  cent  in  the 
United  States  and  limitation  of  their  legal-tender 
power  to  $5.  Silver,  en/od. 

Maximum  of  the  production  of  gold  reached  in 
California  when  it  amounted  to  $65,000,000. 

1854. — Introduction  of  gold  standard  in  Portugal 


362  BANKING,  CREDIT  AND  FINANCE 

on  the  basis  of  the  crown  of  16.257  grams  fine.  Be- 
fore this  period  the  country  had  the  silver  standard, 
Avith  a  rather  large  circulation  of  gold  coins  stamped, 
on  the  basis  of  1  to  151/2  in  1835  and  1  to  I6I/2  in 
1847.    Silver,  Gli^d. 

Modification  of  the  ratio  of  1  to  15.77  in  Spain  by 
raising  it  to  1  to  15.48,  and  by  lowering  the  piaster 
from  23.49  grams  to  23.36  grams  fine. 

Introduction  of  the  silver  standard,  as  it  existed 
in  the  mother  country,  in  Java,  in  place  of  the  ideal 
Javanese  money,  and  cokiage  of  colonial  silver  pieces. 

1857. — Conclusion  of  a  monetary  treaty  between 
Austria  and  the  German  States,  in  accordance  with 
which  1  pound  of  fine  silver  (one-half  a  kilogram) 
was  stamped  into  30  thalers,  or  521/2  florins  of  south 
Germany,  or  45  Austrian  florins,  resulting  in  1  thaler 
equaling  1%  German  florins,  or  II/2  Austrian  florins. 
Silver,  613/4d. 

1861. — ^Law  decreeing  the  coinage  of  gold  pieces 
of  10  and  20  francs  exactly  equal  to  French  coins  of 
the  same  denomination  in  Belgium.    Silver,  6134d. 

1862. — Adoption  of  the  French  monetary  system  by 
Italy.    Silver,  61  7-16d. 

1865. — ^FoiTnation  of  the  Latin  Union  between 
France,  Belgium,  Switzerland  and  Italy  on  the  basis 
of  a  ratio  of  1  to  15^2-    Silver,  61  l-16d* 

1868. — ^Adoption  of  the  French  monetary  system 
by  Roumania,  with  the  exclusion  of  the  5-f  ranc  silver 
piece,  which  was,  however,  stamped  in  1881  and  1883. 
SHver,  60i/od. 

Admission  of  Greece  into  the  Latin  Union.    The 


MONETARY  EVENTS  SINCE  1786  »63 

definite  and  universal  introduction  of  the  French 
monetary  system  into  the  country  was  effected  onlv 
in  1883. 

Adoption  of  the  French  monetary  system,  with 
the  peseta  or  franc  as  the  unit,  by  Spain.  The  coin- 
age of  gold  alphonses  d'or  of  25  pesetas  was  made 
only  in  1876. 

1871. — Replacing  of  the  silver  standard  in  Ger- 
many by  the  gold  standard.  Coinage  in  1873  of 
gold  pieces  of  5,  10  and  20  mark  pieces,  the  latter 
weighing  7.168  grams  fine.    Silver,  60i/2d. 

Establishment  of  the  double  standard  in  Japan 
with  the  ratio  of  1  to  16.17  by  the  coinage  of  the  gold 
yen  of  1.667  grams  and  of  the  silver  yen  of  26.956 
grams,  both  with  a  fineness  of  .900. 

1873. — ^Increase  of  the  intrinsic  value  of  the  sub- 
sidiary coins  of  the  United  States.  Replacing  of  the 
double  standard  by  the  gold  standard.  Reduction 
of  the  cost  of  coinage  of  gold  to  one-fifth  per  cent, 
the  total  abolition  of  which  charge  was  decreed  in 
1875.  Creation  of  a  trade  dollar  of  420  grains,  with 
a  fineness  of  .900.    Silver,  59i4d. 

Suspension  of  the  coinage  of  5-franc  pieces  in  Bel- 
gliun. 

Limitation  of  the  coinage  of  5-francs  on  individual 
account  in  France. 

Suspension  of  the  coinage  of  silver  in  Holland. 

Formation  of  the  Scandinavian  Monetary  Union. 
Replacing  of  the  silver  standard  in  Denmark,  Sweden 
and  Norway  by  that  of  gold  on  the  basis  of  the  krone. 


364  BANKING,  CREDIT  AND  FINANCE 

Coinage  of  pieces  of  10  and  20  kroner,  the  latter 
weighing  8.961  grains,  with  a  fineness  of  .900. 

1874 — Introduction  of  the  system  of  contingents 
for  the  coinage  of  5-franc  silver  pieces  in  the  Latin 
Union.    Silver,  58  5-16d. 

1875. — Suspension  of  the  coinage  of  silver  on  indi- 
vidual account  in  Italy.    Silver,  56%d. 

Suspension  of  the  coinage  of  silver  on  aocount  of 
the  Dutch  colonies. 

Introduction  of  the  double  standard  in  Holland 
on  the  basis  of  the  ratio  of  1  to  15.62  by  the  crea- 
tion of  a  gold  piece  of  10  florins,  weighing  5.048 
grains  fine,  with  the  maintenance  of  the  suspension 
of  the  coinage  of  silver. 

1876. — Great  fluctuations  in  the  price  of  silver, 
which  declined  to  46%'d.,  representing  the  ratio  of 
1  to  20.172,  in  July.  Recovery  in  December  to  581/2<1- 
Average  price,  5234d. 

1877. — Coinage  of  5-franc  silver  pieces  by  Spain 
cx)ntinued  later,  notwithstanding  the  decline  of  sil- 
ver in  the  market.    Silver,  54%d. 

Replacing  of  the  double  standard  in  Finland  by 
that  of  gold  on  the  basis  of  the  mark  or  franc. 

1878. — Act  of  United  States  Congress  providing 
for  the  purchase,  from  time  to  time,  of  silver  buUion, 
at  the  market  price  thereof,  of  not  less  than  $2,000,- 
000  worth  per  -month  as  a  minimmn,  nor  more  than 
$4,000,000  worth  per  month  as  a  maximum,  and  its 
coinage  as  fast  as  purchased  into  silver  dollars  of 
4121/2  grains.  The  coinage  of  silver  on  private  ac- 
count prohibited.    Silver,  52  9-16d, 


MONETARY  EVENTS  SINCE  1786  865 

1870. — Suspension  of  the  sales  of  silver  by  Ger- 
many.   Silver,  Sli/^d. 

1881. — Second  international  monetary  conference 
in  Paris.    Silver,  51  ll-16d. 

1885. — ^Introduction  of  the  double  standard  in 
Egypt.    Silver,  483/8d. 

Prolongation  of  the  Latin  Union  to  Januarv  1, 
1891. 

1886. — Great  decline  in  the  price  of  silver,  which 
fell  in  August  to  42d.,  representing  a  ratio  of  1  to 
22.5,  and  recovery  in  December  to  46d.  Modification 
of  the  coinage  of  gold  and  silver  pieces  in  Russia. 
Silver,  45%d. 

1887. — Retirement  of  the  trade  dollars  by  the 
government  of  the  United  States  in  February.  De- 
monetization of  the  Spanish  piasters,  known  as 
Ferdinand  Carolus,  whose  reimbursement  at  the  rate 
of  5  pesetas  ended  on  March  11.  New  decline  of 
silver  in  March  to  44d.,  representing  the  ratio  of 
1  to  21.43.  Silver,  44%d. 

1890. — United  States:  repeal  of  the  act  of  February 
28,  1878,  commonly  known  as  the  Bland-Allison 
law,  and  substitution  of  authority  for  purchase  of 
4,500,000  fine  ounces  of  silver  each  month,  to  be  paid 
for  by  issue  of  treasury  notes  payable  in  coin.  (Act 
of  July  14,  1890.)  Demonetization  of  25,000,000  lei 
in  pieces  of  5  lei  in  Roumania  in  consequence  of  the 
introduction  of  the  gold  standard  by  the  law  of 
October  27.    Silver,  47  ll-16d. 

1891.— Introduction  of  the  French  monetary  sys- 
tem in  Tunis  on  the  basis  of  the  gold  standard.   Coin- 


36€  BANKING,  CREDIT  AND  FINANCE 

age   of   national    gold    coins    and   bullion.     Silver 
45  l-16d. 

1892. — Replacing  of  the  silver  standard  in  Austria- 
Hungary  by  that  of  gold  by  the  law  of  August  2. 
Coinage  of  pieces  of  20  crowns,  containing  6,098 
grams  fine.  The  crown  equals  one-half  florin.  Meet- 
ing of  the  third  international  monetary  conference 
at  Brussels.  Production  of  gold  reaches  its  max- 
imum, varying  between  675,000,000  and  734,000,000. 
francs.    Silver,  39  13-16d. 

1893. — Suspension  of  the  coinage  of  silver  in 
British  India  and  of  French  trade  dollars  on  indi- 
vidual account.  Panic  in  the  silver  market  in  July 
in  London,  when  the  price  fell  to  30i/2cl.,  representing 
the  ratio  of  1  to  30.92.  Repeal  of  the  purchasing 
clause  of  the  act  of  July  14,  1890,  by  the  Congress 
of  the  United  States. 

1895. — ^Adoption  of  the  gold  standard  by  Chile. 

Russia  decides  to  coin  100,000,000  gold  rubles  in 
1896, 

1896. — Cost  Rica  adopts  the  gold  standard. 

Russia  decides  to  resimae  specie  payments. 

1897. — Adoption  of  the  gold  standard  by  Russia 
and  Japan. 

Peru  suspends  the  coinage  of  silver  and  prohibits 
its  importation. 

1898. — Ecuador  limited  the  tender  of  silver  coins 
to  the  amount  of  10  sucres. 

1899. — India  adopted  the  gold  standard  at  the  rate 
of  15  rupees  to  1  pound  sterling  (British  standard.) 

1900. — United  States  adopted  the  gold  standard. 


MONETARY  EVENTS  SINCE  1786  867 

Ecuador  adopted  the  gold  standard. 

1901.— San  Domingo  adopted  United  States  gold 
as  standard. 

1902. — Siam  adopted  the  gold  standard. 

1903. — Colombia  adopted  gold  standard. 

Philippines  adopted  the  gold  standard. 

1904. — Panama  adopted  gold  standard. 

1905. — Mexico  adopted  the  gold  standard. 

1908. — Creation  of  a  National  Monetary  Commis- 
sion in  the  United  States  to  report  upon  desirable 
changes  in  the  monetary  system. 

1909. — December  21,  special  report  to  Congress  by 
the  Monetary  Commission  on  the  condition  of  the 
25,000  banks  in  the  United  States. 

1913. — ^Approval  of  Banking  and  Currency  Act  for 
the  United  States,  establishing  a  system  of  Federal 
Reserve  Banks,  under  the  supervision  of  a  Federal 
Reserve  Board  and  designed  to  furnish  a  more  elastic 
currency  for  commercial  purposes. 

1914. — Establishment  of  twelve  Federal  Reserve 
Banks,  in  principal  banking  centers  of  the  United 
States,  under  the  provisions  of  the  Act  of  1913. 

1916. — ^Establishment  by  Act  of  Congress  of  Fed- 
eral Farm  Loan  system,  for  encouragement  of  agri- 
culture and  development  of  rural  credits. 

1917.— United  States  enters  the  World  War,  with 
consequent  bond  issues. 

1919.— General  depreciation  of  European  currency 
and  fall  in  foreign  exchange. 


368  BANKING,  CREDIT  AND  FINANCE 

1920-22. — Period  of  general  reconstruction  follow- 
ing the  war,  with  strenuous  efforts  on  the  part  of  all 
countries  to  effect  a  return  to  normalcy. 


Questions  for  Review,  Chapter  XVIII. 

1.  In  what  year  was  the  double  standard  established 
in  the  United  States,  and  on  what  basis  ? 

2.  When  was  the  United  States  Mint  established? 

3.  In  what  year  was  the  double  standard  abolished  in 
Engrland  and  the  gold  standard  adopted  ? 

4.  What  is  meant  by  "the  average  rate  for  silver  per 
ounce  standard?" 

5.  When  was  the  ratio  of  1  to  16  substituted  for  that 
of  1  to  15  in  the  United  States,  and  how  was  it  accomplished  ? 

6.  In  what  years  were  the  gold  mines  of  California  and 
Australia  discovered? 

7.  When  was  the  maximum  of  the  production  of  gold 
reached  in  California  and  what  was  its  value? 

8.  What  was  the  basis  of  the  Latin  Union  between 
France,  Belgium,  and  Switzerland,  and  when  was  it  formed  ? 

9.  When  was  the  silver  standard  in  Germany  replaced 
by  the  gold  standard  ? 

10.  What  important  monetary  events  occurred  in  the 
United  States  in  1873? 

11.  When  was  the  Scandinavian  Monetary  Union  formed 
and  what  was  its  basis  ? 

12.  What  were  the  provisions  of  the  United  States  Silver 
Coinage  Act  of  1878? 

13.  When  did  the  first  International  Monetary  Confer- 
ence in  Paris  meet? 

14.  When  was  the  Bland  silver  law  in  the  United  States 
repealed  and  what  was  substituted  therefore? 

15.  What  was  the  amount  of  the  production  of  gold  in 
1892,  when  it  reached  its  maximum? 

16.  When  was  the  gold  standard  adopted  in  India?  in  the 
United  States?    in  Mexico? 

17.  When  was  the  National  Monetary  Commission  ap- 
IX)inted  in  the  United  States  and  for  what  purpose  ? 


APPENDIX 

1.  History  of  Banking. 

2.  Provisions  of  the  Edge  Bill. 


369 


APPENDIX 

HISTORY  OF  BANKING 

There  is  but  little  information  available  as  to  the 
kind  of  banks  that  existed  in  the  earlier  ages,  or 
on  what  system  they  conducted  their  business.  As 
most  of  the  nations  of  antiquity  subsisted  chiefly  on 
agriculture,  they  probably  had  little  occasion  for 
banks;  for  it  is  only  in  commercial  countries  that 
these  institutions  have  attained  to  any  high  degree 
of  prosperity.  And  as  even  the  commercial  nations 
of  antiquity  were  unacquainted  with  joint-stock  com- 
panies or  commercial  corporations,  and  had  not  dis- 
covered the  use  of  paper-money  or  bills  of  exchange, 
the  business  of  a  banker,  even  among  them,  must 
have  been  very  different  from  that  of  a  banker  of 
the  present  day. 

The  merchants  of  those  early  times  employed  as 
money,  gold  and  silver  bullion;  and  received  it  and 
j)aid  it  away  by  weight.  It  is  probable  that  the 
merchants  would  require  that  the  precious  metals 
they  received  should  be  of  a  certain  degree  of  fine- 
ness. Thus  when  we  read  of  a  father  in  Israel 
weighing  out  as  a  payment  400  shekels  of  silver, 
*' current  money  with  the  merchant  "(Genesis  xxiii, 
16) — the  phrase  implies  that  the  money  current  with 
the  merchant  w^as  different  from  that  in  ordinary  use. 

370 


HISTORY  OF  BANKING  371 

After  bullion  was  superseded  by  coin,  and  each 
nation  had  a  coin  of  its  own,  the  merchants  would 
necessarily  in  the  course  of  their  business  receive 
coins  belonging  to  dift'erent  nations,  and  hence  would 
be  applied  to  by  strangers  who  wished  to  exchange 
their  own  money  for  the  money  of  the  country  in 
which  they  sojourned.  This  would  take  place  more 
particularly  in  those  oriental  countries  whose  in- 
habitants were  accustomed  in  certain  seasons  to  meet 
together  for  the  celebration  of  public  festivals. 

The  Jewish  Money- Changers. — ^We  read  in  the 

New  Testament  of  money-changers  who  had  tables 
in  the  temple  of  Jerusalem.  It  is  probable  they 
attended  for  the  purpose  of  giving  Jewish  money 
in  exchange  for  those  various  coins  which  persons 
coming  from  the  neighboring  countries  might  have 
brought  with  them. 

Whether  the  business  of  money-changing  was  car- 
ried on  as  a  separate  employment,  or  united  with  the 
general  business  of  a  merchant,  we  are  not  informed; 
but  it  is  stated  that  the  exchangers  allowed  interest 
for  money  lodged  in  their  hands.  * '  Thou  wicked  and 
slothful  servant,  thou  oughtest  to  have  put  my  money 
to  the  exchangers,  and  then  at  my  coming  I  should 
have  received  mine  own  with  usury.'*  (Matthew 
xxv,  27.)  From  the  circumstances  of  their  allowing 
interest  on  money,  we  may  infer  that  they  also  lent 
money  on  interest;  other^vise  they  would  have  had 
no  use  for  the  money  they  borrowed.  This  scanty 
information  forms  the  whole  of  our  knowledge  re- 
specting the  mode  of  banking  practised  by  the 
ancient  Babylonian,  Egyptian  and  Jewish  nations. 


-372  BANKING,  CREDIT  AND  FINANCE 

The  Banks  of  Ancient  Greece. — ^With  respect  to 
the  bankers  of  Greece  we  have  more  ample  details, 
some  of  these  being  interestingly  recoimted  by  J.  W. 
Oilbart,  F.  R.  S.,  in  his  ''History,  Principles  and 
Practice  of  Banking." 

In  Greece  the  first  banks  were  the  temples.  We 
read  that  "the  wealth  and  growing  estimation  of 
Delphi  had  also  another  source,  of  which  information 
remains  only  so  far  as  to  assure  us  of  the  fact  with 
far  less  explanation  of  circumstances  than,  for  its 
importance  might  be  desired.  In  the  general  in- 
security of  property  in  the  early  ages,  and  especially 
in  Greece,  it  was  highly  desirable  to  convert  all  that 
could  be  spared  from  immediate  use  into  that  which 
might  more  easily  be  removed  from  approaching 
danger.  With  this  view,  by  a  compact  imderstood 
among  men,  the  precious  metals  appear  to  have  ob- 
tained their  early  estimation. 

Gold  and  silver,  having  thus  acquired  their  certain 
value  as  signs  of  wealth,  a  deposit  secure  against  the 
dangers  continually  threatening,  not  individuals 
only,  but  every  town  and  state  in  Greece,  would  be 
a  great  object  of  the  wealthy.  Such  security-  was 
offered  nowhere  in  equal  amount  as  in  the  temples 
which  belonged  not  to  any  single  state,  but  were 
respected  by  the  common  religion  of  the  nation.  The 
priesthood,  not  likely  to  refuse  the  charge,  would 
have  a  large  interest  in  acquiring  the  reputa- 
tion of  fidelity  to  it.  Thus  the  temple  at  Delphi  ap- 
pears to  have  become  the  great  bank  of  Greece,  per- 
haps before  Homer,  in  whose  time  its  riches  seem  to 
have  been  already  proverbial    Such  then  was  found 


HISTORY  OF  BANKING  373 

the  value  of  this  institution,  that  when  the  Dorian 
conquerors  drove  so  large  a  part  of  the  Greek  nation 
into  exile,  the  fugitives  who  acquired  new  settle- 
ments in  Asia  established  there  their  own  national 
bank  in  the  manner  of  that  of  theii-  foi-mer  countiy, 
recommending  it  to  the  protection  of  the  same  divin- 
ity. The  Temple  of  Apollo,  at  Branchidae,  became 
the  great  depository  of  the  wealth  of  Ionia.  (Mit- 
ford's  History  of  Greece.) 

Afterward  the  temple  of  Olympia,  like  that  of 
Delphi,  became  an  advantageous  repositorj^  for  treas- 
ure. But  although  the  temples  discharged  one  of  the 
offices  of  banks,  by  being  places  of  security,  yet  as 
they  did  not  grant  interest  on  the  money  deposited, 
they  did  not  supersede  banks  of  deposit  established 
by  private  individuals. 

Methods  of  Athenian  Bankers. — At  Athens, 
especially,  banking  was  a  flourishiug  trade,  which 
is  thus  described  by  the  Abbe  Barthelemy  ia 
** Travels  of  Anacharsis  in  Greece": 

"The  greater  part  of  the  Athenians  employ  their 
money  in  trade,  but  they  are  not  permitted  to  lend 
it  for  any  place  but  Athens.  They  receive  an  inter- 
est for  the  use  of  it  which  is  not  fixed  by  the  laws, 
but  stipulated  in  a  contract,  deposited  either  in  the 
hands  of  a  banker  or  some  friend  to  both  parties. 
If,  for  instance,  a  voyage  is  to  be  made  to  the  Cym- 
merian  Bosphorus,  the  instrument  specifies  the  time 
of  the  departure  of  the  vessel,  the  kind  of  commod- 
ities with  w^hich  she  is  to  be  freighted,  the  sale  which 
is  to  be  made  of  them  in  the  Bosphorus,  and  the  mer- 
chandise which  she  is  to  bring  back  to  Athens;  and 


374  BANKING,  CREDIT  AND  FINANCE 

as  the  duration  of  the  voyage  is  uncertain,  some 
agree  that  their  money  shall  not  be  jjayable  till  the 
return  of  the  vessel,  while  others,  more  timid,  and 
contented  with  a  less  profit,  require  that  it  shall  be 
repaid  at  the  Bosphorus  immediately  after  the  sale 
of  the  goods  carried  out;  in  which  case  they  either 
themselves  repair  to  the  place  where  they  are  to  re- 
ceive it,  or  send  thither  some  person  in  whom  they 
can  confide,  and  whom  they  empower  to  act  for  them. 

"The  lender  has  his  security,  either  on  the  mer- 
chandise or  the  goods  of  the  borrower;  but  as  the 
dangers  of  the  sea  are  in  part  risked  by  the  former, 
and  the  profit  of  the  latter  may  be  very  considerable, 
the  interest  of  money  thus  lent  may  rise  as  high  as 
thirty  per  cent,  more  or  less,  according  to  the  length 
and  hazards  of  the  voyage. 

"The  usury  here  spoken  of  is  known  by  the  name 
of  maritime:  that  called  landed  usury  is  more  op- 
pressive, and  no  less  variable. 

"Those  who,  without  risking  the  dangers  of  the 
sea,  wish  to  derive  profit  from  their  money,  lend  it 
to  bankers  at  the  rate  of  twelve  per  cent  per  annum, 
or  rather  one  per  cent  for  every  new  moon.  But  as 
the  laws  of  Solon  do  not  prohibit  those  who  have 
money  from  demanding  the  most  extravagant  inter- 
est for  it,  some  persons  receive  more  than  sixteen 
per  cent,  and  others,  especially  among  the  lower 
classes  of  people,  exact  every  day  the  quarter  of  the 
principal.  These  extortions  are  not  concealed  and 
cannot  be  punished,  except  by  the  public  opinion, 
which  condemns,  but  does  not  sufficiently  despise 
those  who  are  guilty  of  them. 


HISTORY  OF  BANKING  375 

Commerce  Gave  Rise  to  Bankers. — "Commerce 
increases  the  circulation  of  wealth,  and  this  circula- 
tion has  given  birth  to  the  occupation  of  bankers, 
which  facilitates  it  still  more.  A  person  who  is  about 
to  make  a  voyage,  or  who  fears  to  keep  by  him  too 
great  a  sum  of  money,  lodges  it  in  the  hands  of  these 
banl^ers,  sometimes  only  as  a  trust,  and  without  re- 
quiring any  interest,  and  sometimes  on  condition  of 
sharing  with  them  the  profits  it  shall  produce.  They 
advance  money  to  generals  who  go  to  take  on  them 
the  command  of  armies,  or  other  individuals  who 
stand  in  need  of  their  assistance. 

"In  the  greater  part  of  bargains  made  by  them,  no 
witness  is  required;  they  content  themselves  with 
entering  in  a  register  that  such  a  person  has  deposit- 
ed in  their  hands  such  a  sum,  which  they  must  repay 
to  such  another,  if  the  former  should  happen  to  die. 
It  would  sometimes  be  very  difficult  to  prove  that 
they  have  received  a  smn  of  money,  were  they  to 
deny  it;  but  if  they  should  expose  themselves  to  such 
a  charge  more  than  once,  they  would  lose  the  confi- 
dence of  the  public,  on  which  depends  their  success 
in  the  business  in  which  they  are  engaged. 

"By  employing  the  money  deposited  in  their 
hands,  and  lending  it  at  a  greater  interest  than  they 
are  to  pay  for  it,  they  amass  riches  which  gain  them 
friends,  whose  protection  they  purchase  by  assidu- 
ous services.  But  all  is  lost  when,  unable  to  call  in 
their  money,  they  are  incapable  of  fulfilling  their 
engagements.'  They  are  ithen  obliged  to  conceaJ 
themselves,  and  can  only  escape  the  severity  of  jus- 
tice by  surrendering  all  their  remaining  property 
to  their  creditors. 


376  BANKING,  CREDIT  AND  FINANCE 

*' Those  who  wish  to  exchange  foreign  moneys 
apply  to  the  bankers,  who  by  different  means,  as  the 
touchstone  and  the  balance,  examine  whether  they 
are  not  adulterated  or  deficient  in  weight. " 

The  First  Joint-Stock  Bank. — In  a  treatise  pub- 
lished by  Xenophon,  upon  the  Athenian  revenue,  we 
meet  with  the  first  suggestion  for  the  establishment 
of  a  joint-stock  bank.  Of  this  historic  step,  Mitford 
says:  *'A  very  remarkable  project,  which  seems  to 
have  been  original  with  Xenophon,  next  occurs — ^the 
establishment  of  a  bank  by  subscription,  open  to  all 
the  Athenian  people.  The  interest  of  money,  it  ap- 
pears, was  enoimous  at  Athens,  an  unavoidable  con- 
sequence of  the  wretched  insecurity  of  person  and 
property.  Throughout  modern  Europe,  land  is,  of 
all  property,  esteemed  the  safest  source  of  income; 
but  in  Greece  it  was  held  that  the  surest  return  was 
from  money  lent  at  interest.  For  in  the  multiplied 
division  of  Greece  into  small  republics  with  very 
narrow^  territories,  the  produce  of  land  was  continu- 
ally liable  to  be  carried  off  or  destroyed  by  an  invad- 
ing enemy,  but  a  moneyed  fortune,  according  to 
Xenophon 's  observation,  was  safe  wdthin  the  city 
walls.  In  proportion,  then,  to  the  interest  of  money, 
and  the  insecurity  of  all  things,  the  profits  of  trade 
will  always  be  high,  and  thus  numbers  would  be  in- 
duced to  boiTow,  even  at  a  high  interest. 

*^  Xenophon  therefore  proposed,  by  lending  from 
the  public  stock,  and  encouraging  commercial  ad- 
venture by  just  regulations,  to  raise  a  great  revenue, 
and,  by  the  same  means,  instead  of  oppressing  to 
enrich  individuals.  As  corollary  then,  to  his  project, 


HISTORY  OF  BANKING  377 

when  the  amount  of  the  subscription  or  its  pro- 
fits might  allow,  he  proposed  to  improve  the  ports 
of  Athens,  to  form  wharves  and  docks,  to  erect  halls, 
exchanges,  warehouses,  market-houses,  and  iuns,  for 
all  which  tolls  and  rents  should  be  paid;  and  to  build 
ships  to  be  let  to  merchants.  Thus,  while  numbers 
of  individuals  were  encouraged  and  enabled  to  em- 
ploy themselves  for  their  private  benefits,  the  whole 
Athenian  people  would  become  one  great  banking 
company,  from  whose  profits  every  member,  it  was 
expected,  would  derive  at  least  an  easy  livelihood." 

The  Banks  of  Ancient  Rome.— In  Rome,  the  bank- 
ers were  called  Argentarii,  Mensarii,  Numularii,  or 
Collybistae.  The  banking-houses  or  banks  were  call- 
ed Tabernae  Argentariae,  or  Mensae  Numulariae. 
Some  of  these  bankers  were  appointed  by  the  govern- 
ment to  receive  the  taxes,  others  carried  on  business 
on  their  own  account.  Their  mode  of  transacting 
business  was  somewhat  similar  to  that  which  is  hi 
use  in  modern  times. 

Into  these  houses  the  State,  or  men  of  wealth, 
caused  their  revenues  to  be  paid,  and  they  settled 
their  accounts  with  their  creditors  by  giving  a  drait 
or  check  on  the  bank.  If  the  creditor  also  had  an 
account  at  the  same  bank,  the  account  was  settled 
by  an  order  to  make  the  transfer  of  so  much  money 
from  one  name  to  another.  To  assign  over  money 
or  to  pay  money  by  a  draft,  was  called  *'praes- 
cribere,"  and  ^'rescribere";  the  assignment  or  draft 
was  called  **attributio." 

Roman  Bankers  in  Disrepute. — These  bankers, 
too,  were  money-changers.    They  also  lent  money 


378  BANKING,  CREDIT  AND  FINANCE 

on  interest,  and  allowed  a  lower  rate  of  interest  on 
money  deposited  in  their  hands. 

In  a  country  where  commerce  was  looked  upon 
with  contempt,  banking  could  not  be  deemed  very 
respectable.  Among  most  of  the  ancient  agricul- 
tural nations  there  was  a  prejudice  against  the  tak- 
ing of  interest  for  the  loan  of  money.  Hence  the 
private  bankers  at  Rome  were  sometimes  held  in 
disrepute,  though,  on  the  other  hand,  those  whom 
the  government  had  established  as  public  cashiers, 
or  receivers-general,  as  we  may  term  them,  held  so 
exalted  a  rank  that  some  of  them  became  consuls. 

The  Romans  had  also  loan  banks,  from  which  the 
poor  citizens  received  loans  without  paying  interest. 
We  are  told  that  the  confiscated  property  of  crim- 
inals was  converted  into  a  fund  by  Augustus  Caesar, 
and  that  from  this  fund  sums  of  money  were  lent 
without  interest  to  those  citizens  who  could  pledge 
value  to  double  the  amount.  The  same  system  was 
pursued  by  Tiberius.  He  advanced  a  large  capital, 
which  was  lent  for  a  term  of  two  or  three  years  to 
those  who  could  give  landed  security  to  double  the 
value  of  the  loan.  Alexander  Severus  reduced  the 
market-rate  of  interest  by  lending  sums  of  money 
at  a  low  rate,  and  by  advancing  money  to  poor  cit- 
izens to  purchase  lands,  and  agTeeing  to  receive  pay- 
ment from  the  produce. 

Origin  of  the  Word  ''Bank.'* — After  commerce 
and  the  arts  had  revived  in  Italy,  the  business  of 
banking  was  resumed.  The  word  ''bank"  is  com- 
monly regarded  as  derived  from  the  Italian  word 
"banco,"  a  bench — the  Jews  in  Lombardy  having 


HISTORY  OF  BANKING  879 

benches  in  the  market-place  for  the  exchange  of 
money  and  bills.  When  a  banker  failed,  his  bench 
was  broken  by  the  populace;  and  from  this  circmn- 
stance  we  have  our  word  "bankrupt." 

But  while  this  is  the  derivation  generally  ac- 
cepted, some  writers  have  asserted  that  a  more  ac- 
curate explanation  of  the  use  of  the  word  "bank"  is 
that  which  makes  it  synonymous  with  the  Italian 
"monte"  (Latin  "mons,  mentis)",  a  mound,  heap, 
or  bank.  Thus  the  Italian  Monte  di  Pieta  and  the 
French  Monte  de  Piete  signify  "a  Charity  Bank." 
Bacon  and  Evelyn  use  the  word  in  the  same  sense. 

Bacon  says:  "Let  it  be  no  bank  or  common  stock, 
but  every  man  be  master  of  his  own  money."  Eve- 
lyn, referring  to  the  Monte  di  Pieta  at  Padua, 
writes:  "There  is  a  continual  bank  of  money  to 
assist  the  poor."  Blackstone  also  says:  "At 
Florence,  in  1344,  government  owed  £60,000,  and 
being  unable  to  pay  it,  formed  the  principal  into  an 
aggregate  sum  called,  metaphorically  a  Mount  or 
Bank." 

The  Florentine  Bankers. — Though  the  states  of 
Venice  and  Genoa  made  the  most  rapid  advances  in 
commerce,  and  established  public  banks,  yet  the  de- 
partment of  banking  appears  to  have  fallen  more 
particularly  into  the  hands  of  the  Florentines. 

"As  the  Florentines  did  not  (like  the  Venetians 
and  the  Genoese)  possess  any  commodious  seaport, 
their  active  exertions  were  directed  chiefly  towards 
the  improvement  of  their  manufactures  and  domes- 
tic industry.  About  the  beginning  of  the  four- 
teenth century,   the  Florentine  manufacturers  of 


380  BANKING,  CREDIT  AND  FINANCE 

various  kinds,  particularly  those  of  silk  and  woolen 
cloth,  appear,  from  the  enumeration  of  a  well-in- 
formed historian,  to  have  been  very  considerable. 
The  connections  which  they  formed  in  different 
parts  of  Europe,  by  furnishing  them  with  the  pro- 
ductions of  their  own  industry,  led  them  to  engage 
in  another  branch  of  trade,  that  of  banking.  In  this 
they  soon  became  so  eminent,  that  the  money  trans- 
actions of  almost  every  kingdom  in  Europe  passed 
through  their  hands,  and  in  many  of  them  they  were 
entrusted  with  the  collection  and  administration  of 
the  public  revenues.  In  consequence  of  the  activity 
and  success  with  which  they  conducted  their  manu- 
factures and  money  transactions — the  former  al- 
ways attended  with  certain  though  moderate  profit, 
the  latter  lucrative  in  a  high  degree,  at  a  period 
when  neither  the  interest  of  money  nor  the  premium 
on  biUs  of  exchange  was  settled  with  accuracy — 
Florence  became  one  of  the  first  cities  in  Christen- 
dom, and  some  of  its  citizens  extremely  opulent." 
(Robertson's  ** Disquisition  on  India.'') 

Cosmo  di  Medici  of  Florence  was  reckoned  in  his 
day  the  most  wealthy  merchant  ever  known  in 
Europe,  and  in  a  treaty  whereby  Louis  XI  engaged 
to  pay  Edward  VI  fifty  thousand  crowns  annually, 
it  was  expressly  stipulated  that  the  king  of  France 
should  engage  the  partners  of  the  Bank  of  Medici  to 
become  bound  for  the  faithful  and  regular  perform- 
ance of  this  agreement  on  the  part  of  himself  and  his 
heirs. 

The  Earliest  National  Banks. — Although  the  bus- 
iness of  banking  has  probably  always  been  carried 


HISTORY  OF  BANKING  381 

on  by  private  individuals  before  it  has  been  carried 
on  by  a  public  company,  yet  most  countries  have 
found  it  useful  to  establish  a  public  or  national  bank. 
Some  of  these  banks  have  been  founded  for  the  pur- 
pose of  facilitating  commerce,  others  to  serve  the 
government.  The  most  ancient  of  these  was  founded 
at  Venice. 

The  Bank  of  Venice.— The  first  establishment  of 
banking,  in  a  regular  and  systematic  form,  took 
place  at  Venice  about  the  middle  of  the  twelfth  cen- 
tury (1157) ;  and  it  arose  from  the  necessities  of  the 
state.  Duke  Vitale,  Mitchell  11,  being  involved  in 
expensive  wars  with  the  Empire  of  the  West,  and 
the  Grecian  Manuel,  embarrassed  the  finances  of  the 
republic;  and  to  relieve  it  from  the  pressure  of  its 
difficulties,  he  had  recourse  to  a  forced  loan,  the  con- 
tributors to  which  were  made  creditors,  and  received 
interest  at  the  rate  of  four  per  cent  per  annum.  The 
*' Chamber  of  Loans''  was  established  for  the  man- 
agement of  this  fund,  and  regular  payment  of  the 
interest;  which,  gradually  improving  its  plan,  at  last 
formed  itself  into  the  more  perfect  institution  of  the 
Bank  of  Venice. 

This  celebrated  bank  served  as  a  model  to  almost 
every  similar  establishment  in  succeeding  ages; 
its  capital  was  5,000,000  ducats,  or  $4,800,000,  for 
which  the  republic  was  security.  It  was,  properly, 
a  board  of  deposit,  credit  and  interest.  By  an  edict 
of  the  state,  all  payments  of  wholesale  merchandise, 
and  bills  of  exchange,  were  required  to  be  made  in 
banco,  or  bank  notes;  and  all  debtors  were  obliged 
to  lodge  their  money  in  the  bank,  that  their  creditors 
might  receive  payment  in  banco;  which  was  done  by 


382  BANKING,  CREDIT  AND  FINANCE 

transferring  the  amount  from  the  one  to  that  of  the 
other,  or  by  writing  off  the  smn  from  the  account  of 
the  debtor,  and  placing  it  to  that  of  the  creditor. 
Payments  were  made  in  this  manner  without  the 
intervention  of  gold  or  silver;  but  there  were  excep- 
tions to  this  rule  in  cases  of  retail  trade,  or  when 
foreigners  wished  to  carry  off  the  precious  metals. 

All  the  riches  of  the  state  thus  flowed  into  the 
bank;  and,  through  various  channels,  were  again 
diffused  among  traders,  to  give  activity  to  the  ex- 
tensive commerce  of  this  once  opulent  and  powerful 
city. 

From  its  good  faith,  and  the  regularity  of  its 
transactions,  the  Bank  of  Venice  always  maintained 
a  high  character  in  Europe,  and  on  some  occasions,  its 
obligations  were  more  esteemed  than  the  bonds  of 
kings.  This  bank  may  well  be  deemed  a  wonder 
for  the  twelfth  century,  but  required  much  altera- 
tion in  methods  to  adapt  it  to  the  requirements  of 
the  nineteenth  and  twentieth  centuries. 

During  two  centuries  and  a  half  the  Bank  of 
Venice  was  unrivaled.  The  progress  of  human 
knowledge  was  slow  and  improvements  in  banking 
methods  were  long  in  coming. 

The  Bank  of  Barcelona. — As  early  as  the  year 
1349  the  business  of  banking  was  carried  on  after  a 
fashion  by  the  drapers  of  Barcelona,  who  were  prob- 
ably the  most  wealthy  class  of  merchants  in  that 
city.  But  by  an  ordinance  of  the  king  of  Arragon, 
they  were  not  allowed  to  commence  this  branch  of 
trade  until  they  had  first  given  sufficient  security. 
In  the  year  1401  a  public  bank  was  established  by 


HISTORY  OF  BANKING  888 

the  magistrates.  It  was  called  tlie  Table  of  Ex- 
change, and  was  properly  a  bank  of  exchange  and 
deposit.  Foreign  bills  were  negotiated  with  the 
same  liberality  as  those  of  the  citizens,  and  accom- 
modations were  extended  to  strangers  as  well  as  to 
natives.  It  was  altogether  calculated  for  the  en- 
couragement of  both  external  and  internal  com- 
merce, and  the  funds  of  the  city  were  pledged  as 
security  for  the  responsibility  of  the  bank. 

The  Bank  of  Genoa.— In  the  year  1407,  the  bank 
of  Genoa  commenced,  owing  its  origin  to  the  debts 
of  the  state.  Previous  to  this  time,  the  republic  bor- 
rowed large  smns  of  money  from  the  citizens,  assign- 
ing certain  branches  of  the  revenue  for  the  payment 
of  the  interest,  and  accounting  to  government  for  the 
funds  entrusted  to  its  care.  From  this  circum- 
stance, the  Genoese  claim  the  merit  of  establishing 
a  bank  as  early  as  the  Venetians;  but  it  is  evident 
that  the  transactions  of  this  board  were  only  an  ap- 
proximation to  banking.  In  process  of  time,  how- 
ever, the  multiplicity  and  extent  of  these  funds 
induced  disorder  and  confusion,  and  it  was  deemed 
expedient  to  consolidate  the  whole  into  one  capital 
stock,  to  be  managed  by  a  bank  called  the  Chamber 
of  St.  George,  to  be  governed  by  eight  protectors, 
annually  chosen,  elected  by  the  creditors  and  stock- 
holders. Under  this  form  of  government,  the  af- 
fairs of  the  bank  were  prosperously  conducted;  but 
the  further  increase  of  the  public  debts,  and  the 
acquirement  of  towns  and  territories  as  security, 
among  which  were  the  port  of  Caffa  and  the  little 
kingdom  of  Corsica,  made  the  business  of  the  banl^ 
much  more  complex;  and  the  inconvenience  of  an- 


384  BANKING,  CREDIT  AND  FINANCE 

nual  successions  of  new  protectors  becoming  appar- 
ent, determined  the  Genoese,  in  the  year  1444,  to 
elect  eight  new  governors  for  the  management  of  the 
bank,  of  which  only  two  were  to  go  out  every  year. 

First  Bills  of  Exchange. — Before  the  discovery  of 
the  passage  to  the  Indias,  by  the  Cape  of  Good  Hope, 
the  Venetians  enjoyed  a  monopoly  of  the  lucrative 
trade  of  the  east,  by  means  of  the  Mamelukes  of 
Egypt,  with  whom  they  were  leagued  by  policy  and 
interest,  which  diffused  opulence  and  wealth 
throughout  Italy.  This  extensive  commerce 
created  and  gave  circulation  to  bills  of  exchange,  the 
credit  and  currency  of  which  were  universally  ac- 
knowledged when  they  bore  the  signature  of  the 
banks  of  Italy,  and  for  several  centuries  there  were 
no  other  establishments  of  the  kind  in  Europe. 

The  Bank  of  Amsterdam. — The  Bank  of  Amster- 
dam was  established  on  the  31st  of  January,  1609. 
The  magistrates  of  the  city,  under  authority  of  the 
States,  declared  themselves  the  perpetual  cashiers 
of  the  inhabitants,  and  that  all  payments  above  600 
gilders  (afterwards  reduced  to  300)  and  bills  of  ex- 
change, should  be  made  in  the  bank;  which  obliged 
merchants  to  open  accounts  with  it  for  the  payment 
of  their  foreign  bills.  The  extensive  commerce  of 
Amsterdam  involved  such  a  variety  of  transactions 
that  the  expediency  of  regulating  them  became  ev- 
ident, and  no  measure  could  more  effectually  secure 
property,  check  lawsuits,  and  prevent  frauds,  than 
the  establishment  of  a  bank  office,  in  which  all  re- 
ceipts and  payments  were  registered  in  books  kept 
open  for  the  pui'pose. 


HISTORY  OF  BANKING  385 

The  origin  of  this  bank  is  ascribed  to  the  debased 
state  of  the  current  coin  which  the  trade  of  Amster- 
dam brought  from  all  quarters  of  Europe,  and  which 
was  sold  at  a  reduction  of  nine  per  cent  below  the 
money  of  the  mint.  Merchants,  in  such  cases,  could 
not  always  find  standard  money  to  pay  bills  of  ex- 
change, the  value  of  which  was  always  uncertain; 
and  accordingly  operated  against  the  United  Prov- 
inces with  foreign  nations.  But  as  the  bank  re- 
ceived the  debased,  light,  or  worn  coin,  at  its  intrin- 
sic value  in  the  good  money  of  the  country,  and  gave 
credit  for  the  amount  in  its  books,  an  invariable 
standard  was  thus  established,  that  tended  greatly 
to  simplify  and  facilitate  the  operations  of  com- 
merce. 

Bank.  Money  at  a  Premium.— T h  e  beneficial 
effects  of  this  establishment  in  Holland  were  soon 
perceived,  and  bank  money  immediately  bore  a  pre- 
mium called  the  "agio,*'  which  is  a  term  to  denote 
the  difference  of  price  between  the  money  of  the 
bank  and  the  coin  of  the  country. 

When  we  consider  that  coin  is  only  a  representa- 
tive of  commodities,  and  that  its  utility  arises  only 
from  its  being  a  generally  acknowledged  measm'e 
and  standard  of  value,  by  which  mankind  in  the 
civilized  state  of  society  are  enabled  to  calculate  the 
price  of  articles  of  exchange,  it  was  not  sui-prising 
that  bank  receipts,  which  represent  property  also, 
and  at  the  same  time  are  not  liable  to  risk,  danger, 
or  deterioration  of  any  kind,  should  be  held  in  higher 
estimation  than  coin,  which  is  exposed  to  robbery, 
and  all  sorts  of  casualities. 


38«  BANKING,  CREDIT  AND  FINANCE 

In  all  countries  where  banks  have  been  regular  in 
their  transactions  and  their  responsibility  undoubt- 
ed, their  paper  has  carried  a  premium,  more  or  less, 
according  to  circumstances,  and  the  agio  of  Amster- 
dam was  generally  about  five  per  cent. 

The  Bank  Capital. — The  amount  of  capital  of  th« 
Bank  of  Amsterdam  was  never  exactly  ascertained. 
It  was  generally  constituted  by  depositors  of  coin, 
and  there  was  full  value  in  its  coffers  for  all  the 
credits  and  receipts  it  issued.  The  bank,  however, 
gave  credit  and  receipts  also  upon  deposits  of  gold 
and  silver  bullion,  at  the  rate  of  five  per  cent  less 
than  the  mint  price  of  such  bullion,  which  was  re- 
stored to  the  owner  if  he  called  for  it  within  six 
months,  upon  paying  one-fourth  per  cent  if  the  de- 
posit was  in  silver,  or  one-half  per  cent  if  in  gold. 
But  if  the  teiTQ  of  six  months  was  allowed  to  expire, 
the  bank  retained  the  bullion  at  the  price  stated  in 
its  books. 

The  advantage  of  making  deposits  in  this  bank 
was  two-fold :  First,  the  credit  enabled  the  merchant 
to  pay  his  bills  of  exchange ;  second,  the  receipt  gave 
him  an  opportunity  of  selling  his  bullion  at  an  ad- 
vance price,  if  the  market  should  fluctuate  in  his 
favor.  ''Although  none  could  draw  out  bullion  with- 
out producing  a  receipt,  and  reassigning  bank  money 
equal  to  the  price  at  which  the  bullion  had  been  re- 
ceived, yet  it  was  not  absolutely  necessary  that  both 
credit  and  receipt  should  always  remain  in  the  hands 
of  the  same  person;  as  he  who  had  the  receipt  could 
find  bank  money  to  buy  at  the  market  price,  to  en- 
able him  to  relieve  the  bullion,  and  the  owner  of  the 


HISTORY  OF  BANKING  ^^ 

credit  could  at  aU  times  find  receipts  in  abundance,, 
but  to  prevent  any  extraordinary  rise  in  the  price 
of  banl.  money,  or  receipts,  which  speculation  or 
other  causes  might  sometimes  induce,  the  bank 
adopted  the  resolution  of  selling  bank  money  for 

mg  it  at  the  rate  of  four. 

^^The  city  of  Amsterdam  was  guaranty  that  there 
should  always  be  fuU  value  in  the  bank  to  answer 
all  Its  demands;  and  as  the  directors,  who  were  an- 
nuaUy  changed,  compared  the  treasure  with  the 
books,  under  solemn  oath,  there  could  be  no  prob- 
ability of  fraud.''  ^ 

Managed  by  the  Burgomasters.— The  four  reign- 
mg  burgomasters  were  invested  with  the  direction 
of  the  bank,  and  the  city  of  Amsterdam  derived  a 
considerable  revenue  from  it,  which  arose  from  the 
foUowing  sources:  *'For  aU  deposits,  a  fourth  or  half 
per  cent  had  to  be  paid;  from  every  person  who 
opened  an  account,  a  fee  of  ten  gilders  was  exacted, 
and  for  every  additional  account,  three  gilders  three 
stivers;  for  every  transfer,  two  stivers,  or  six  stivers 
if  the  transfer  was  less  than  three  hundred  gilders. 
If  any  person  overdrew  his  account,  he  was  fined 
three  per  cent  on  the  amount,  and  his  order  was  set 
aside.    There  was  also  a  considerable  profit  on  the 
sale  of  foreign  coin,  or  bullion,  which  was  always 
kept  till  it  could  be  sold  to  advantage;  and  likewise 
by  selling  bank  money,  at  five  per  cent  agio,  and  buy- 
ing it  at  four. 

Through  these  various  resources,  the  Bank  of  Am- 
sterdam became  rich  and  prosperous,  and  it  was 


388  BANKING,  CREDIT  AND  FINANCE 

supposed  to  retain  in  its  repositories  more  gold  and 
silver  than  any  other  establishment  of  the  kind  in 
Europe. 

The  Bank  of  Amsterdam  was  the  model  on  which 
were  formed  many  of  the  older  European  banks,  but 
they  have  varied  very  considerably  from  each  other, 
according  to  the  circumstances  of  the  respective 
countries  in  which  they  have  been  established. 

The  Bank  of  North  America. — The  Bank  of  North 
America  owed  its  origin  to  the  vigorous  mind  and 
enterprising  genius  of  Robert  Morris,  who  conceived 
the  idea  of  it  when  superintendent  of  the  public 
finances,  and  submitted  to  Congress  in  the  month  of 
May,  in  the  year  1781,  the  plan  for  establishing  a 
national  Bank  of  North  America. 

Agreeably  to  this  plan,  the  capital  was  to  consist 
of  1,000  shares,  of  $400  each,  or  $400,000,  payable  in 
gold  and  silver,  to  be  increased  by  new  subscriptions, 
from  time  to  time,  at  the  pleasure  of  the  directors. 
The  directors,  twelve  in  number,  were  to  be  chosen 
by  the  stockholders,  and  were  to  be  intrusted  with 
the  management  of  the  institution.  The  notes  of 
the  bank  payable  on  demand  were  to  be  made  a  legal 
tender  in  the  discharge  of  duties,  taxes,  etc. 

On  the  26th  of  May,  in  the  same  year.  Congress 
approved  of  the  plan,  and  passed  several  resolutions, 
by  which  it  pledged  itself  to  support  the  proposed 
institution;  to  incorporate  the  subscribers,  under  the 
name  of  the  president,  directors,  and  company  of 
the  Bank  of  North  America;  to  recommend  to  the 
several  states  the  prevention  of  similar  establish- 
ments within  their  respective  jurisdictions,  during 


HISTORY  OF  BANKING  389 

the  war;  to  receive  the  notes  of  the  institution  iu 
payment  of  taxes,  duties,  and  debts  due  to  the 
United  States,  and  to  use  its  influence  with  the  sev- 
eral legislatures,  to  have  laws  passed,  which  should 
make  it  a  felony  to  counterfeit  the  notes  of  the  bank, 
etc. 

After  this,  subscriptions  were  immediately  opened 
during  the  summer  and  autumn  of  the  same  year. 
In  November,  directors  were  chosen.  In  December, 
Congress,  conformably  to  its  foi-mer  resolutions, 
passed  an  ordinance  which  created  the  subscribers  to 
the  bank  a  coi-poration  for  ever,  under  the  title  of 
''The  President,  Directors,  and  Company  of  the  Bank 
of  North  America."  The  original  features  of  the 
plan  were  preserved,  but  the  bank  was  restricted 
from  holding  property  exceeding  the  amount  of 
$10,000,000. 

The  institution  commenced  its  operations  in  the 
month  of  January  following,  and  Robert  Morris,  who 
may  be  justly  styled  the  father  of  the  system  of  cred- 
it, and  paper  circulation  in  the  United  States 
succeeded  in  securing  for  it  the  good-will  and  con- 
fidence of  the  people  at  large,  by  various  judicious 
measures,  of  which  a  circular  letter,  addressed  to 
the  governors  of  the  several  states,  explaining  the 
object  of  the  institution,  and  the  certain  advantages 
to  be  derived  from  it,  was  not  the  least  effectual. 

''Thus  the  first  bank  in  the  United  States  came 
into  existence,  and  such  was  its  happy  and  immediate 
influence  on  the  public  finances,  and  on  commercial 
concerns  in  general,"  says  Goddard  in  his  History  of 
Banking  Institutions,  "that  it  may  be  justly  doubted 


390  BANKING,  CREDIT  AND  FINANCE 

whether,  without  its  seasonable  aid,  the  revolution- 
ary struggle  for  independence  could  have  been 
brought  to  a  satisfactory  termination. 

An  Aid  to  the  Government.— "The  United  States, 
for  several  years,  was  constantly  indebted  to  the 
bank,  to  a  larger  sum  than  the  stock  they  owned;  nor 
could  the  various  devices  for  creating  a  revenue  have 
answered  their  end,  or  the  army  have  been  fed  and 
clothed,  or  any  degree  of  order  and  punctuality  main- 
tained in  the  dispatch  of  public  affairs  but  for  the 
great  facility  in  the  management  of  business,  and 
the  restoration  of  confidence,  which  were  created  by 
this  institution.  The  sense  of  the  great  utility  of 
the  bank,  was  so  imiversal,  that  Massachusetts  and 
Pennsylvania  corroborated  the  ordinance  of  Con- 
gress, by  additional  charters,  and  Rhode  Island, 
Connecticut,  and  Delaware  passed  laws  for  the  pur- 
pose of  preventing  the  counterfeiting  of  its  notes. 

"Yet  when  peace  had  been  concluded,  and  the 
pressure  of  the  times  was  over,  there  w^ere  not  want- 
ing those  who  viewed  the  prosperous  state  of  the 
affairs  of  the  bank  with  a  jealous  eye,  and  conjured 
up  imaginary  fears  of  an  overbearing  oppression,  an 
alarming  foreign  influence,  and  fictitious  credit,  from 
temporary  pimctuality;  of  a  created  scarcity  of 
specie;  possible  commercial  convulsions,  from  the 
stopping  of  discounts;  partial  favors,  and  compara- 
tive disadvantages,  under  which  distant  traders 
labored;  as  if,  in  a  moral  community,  the  bare  pos- 
sibility of  abuse  could  ever  furnish  a  good  argument 
against  the  decided  utility  of  a  thing;  or  as  if  a  bene- 
fit were  to  be  relinquished,  because  all  cannot  be 


HISTORY  OF  BANKING  891 

benefited  alike.  And  so  effectually  were  those  ob- 
jections against  the  institution  urged,  that  on  the 
13th  of  September,  1785,  the  legislature  of  Pennsyl- 
vania actually  repealed  its  charter.'* 

The  repeal  was  persevered  in  by  the  succeeding 
legislature,  notwithstanding  innumerable  petitions 
to  the  contrary,  and  vast  efforts  to  enlighten  their 
proceedings. 

The  bank,  however,  continued  its  usual  operations 
under  the  charter  from  Congress,  and  in  the  enjoy- 
ment of  corporate  rights,  which,  it  was  presmned, 
could  not  be  arbitrarily  wrested  from  them  after 
having  been  once  legally  bestowed. 

The  legislature  which  met  in  December,  1786,  at 
last  thought  proper  to  renew  the  charter  of  the  bank, 
and  passed  an  act  to  that  effect,  on  the  7th  of  March, 
1787,  by  which,  however,  the  term  of  the  charter 
was  limited  to  fourteen  years,  and  the  capacity  of 
the  corporate  body  of  holding  property  was  restrict- 
ed to  two  millions  of  dollars.  The  same  charter  was 
extended  for  the  term  of  fourteen  years  more,  by 
an  act  passed  on  the  20th  of  March,  1799. 

Bank  of  the  United  States.— The  first  Bank  of  the 
United  States  was  chartered  by  Congress  on  Febru- 
ary 25,  1791,  for  twenty  years.  The  authorized  cap- 
ital was  $10,000,000,  of  which  the  Government  took 
$2,000,000.  The  notes  issued  by  the  bank  were  re- 
ceivable by  the  Govemment  for  all  debts  due  to  it. 
The  charter  of  this  bank  did  not  prevent  the  rise  of  a 
considerable  number  of  banks  in  the  various  States, 
which  also  issued  notes.  But  by  reason  of  its  larger 
capital,  and  its  several  branches  in  different  parts  of 


392  BANKING,  CREDIT  AND  FINANCE 

the  country,  the  Bank  of  the  United  States  domi- 
nated the  entire  banking  system  and  regulated  the 
issue  of  the  State  Banks. 

Early  in  the  nineteenth  century  the  Government 
sold  its  stock  in  the  bank,  and  when  the  charter  ex- 
pired in  1811  the  Government  had  no  direct  interest 
in  its  renewal.  The  renewal  of  the  charter  was  op- 
posed by  the  State  banks,  and  when  the  effort  to 
secure  it  failed,  the  bank  wound  up  its  affairs. 

Congress  chartered  the  second  Bank  of  the  United 
State  on  April  3,  1816,  at  Philadelphia,  with  power 
to  establish  branches.  This  bank  continued  opera- 
tions until  1837,  when  it  failed  in  the  general  crisis, 
the  government  deposits  having  been  withdrawn 
some  time  previously. 

Growth  of  State  Banks. — The  refusal  to  continue 
the  National  Bank  was  followed  by  an  immense 
growth  of  the  State  banking  institutions.  In  1837 
there  were  788  of  them,  with  a  capital  of  $291,000,- 
000.  The  necessity  for  suspension  of  specie  pay- 
ments in  1837  and  again  in  1857  taught  valuable 
lessons  to  the  bankers  of  the  country,  and  the  move- 
ment for  a  national  banking  law  took  form  in  1863, 
during  the  Civil  War,  with  the  passage  of  an  act 
requiring  the  issue  of  bank  notes  to  be  based  upon 
the  deposit  of  government  bonds  with  the  Treasury. 
In  1864  a  bureau  in  the  Treasury  Department,  pre- 
sided over  by  the  Comptroller  of  the  Currency,  was 
given  supervision  over  the  national  banking  system, 
and  definite  rules  for  the  establishment  of  banks 
w^ere  prescribed.  The  banks  w^ere  required  to  main- 
tain sufficient  reserves,  and  bv  October  1866,  the 


HISTORY  OF  BANKING  393 

number  of  national  banks  bad  reached  1,644.  By 
1913  this  number  had  grown  to  7,473,  with  capital, 
surplus,  and  undivided  profits  amounting  to  $2,045,- 
000,000,  and  deposits  of  nearly  six  billion  dollars.  ' 

In  1910  a  Monetary  Commission  was  appointed 
by  the  United  States  Senate  to  investigate  the  whole 
question  of  banking  reform,  and  the  upshot  was  the 
establishment  of  the  Federal  Reserve  Bank  system 
by  an  act  passed  December  23,  1913.  The  features 
of  this  system  are  described  at  length  elsewhere  in 
this  volume. 

Early  Banking  in  England.— We  may  now  trace 
the  rise  and  development  of  banking  in  England,  as 
a  leading  and  typical  commercial  nation,  this  being 
an  integral  part  of  the  history  of  banking  prior  to  its 
development  in  the  United  States. 

For  several  centuries  the  only  coin  current  in 
England  was  made  of  silver,  and  the  highest  denom- 
ination was  the  silver  penny.  This  coin  contained 
about  half  as  much  silver  as  one  of  the  modern  six- 
pences. There  were  also  silver  half -pence  and  silver 
farthings,  and  frequently  the  silver  pennies  were 
cut  into  halves  and  quarters  to  serve  the  purpose 
of  half-pence  and  farthings,  until  laws  were  made 
to  prohibit  the  practice.  Copper  was  not  coined  in 
England  until  the  year  1609,  and  then  the  small  lead- 
en token  previously  issued  by  private  individuals 
was  suppressed. 

Gold  was  first  coined  in  England  in  1257,  but  soon 
went  out  of  circulation,  and  did  not  enter  permanent- 
ly into  currency  until  1344  when  Edward  III  issued 
gold  nobles,  half  nobles,  and  farthing  nobles;  th? 


394  BANKING,  CREDIT  AND  FINANCE 

noble  to  pass  for  6s.  8d.,  the  half  noble  for  3s.  4d., 
and  the  farthing  noble  for  Is.  8d. 

Ofl&ce  of  Royal  Exchanger. — This  coinage  seems  to 
have  given  rise  to  the  office  of  Koyal  Exchanger. 
We  find  the  following  in  Henry's  history  of  England: 
**It  was  not  so  easy  a  matter  in  the  times  we  are  now 
considering  to  exchange  gold  and  silver  coins  for 
each  other  as  it  is  at  present,  and  therefore  Edward 
ni  and  several  of  his  successors  took  this  office  into 
their  ow^n  hands,  to  prevent  private  extortion  as  well 
as  for  their  own  advantage,  and  they  performed  it 
by  appointing  certain  persons  furnished  with  a  com- 
petent quantity  of  gold  and  silver  coins,  in  London 
and  other  towns,  to  be  the  only  exchangers  of  money, 
at  the  following  rate:  When  these  royal  exchangers 
gave  silver  coins  for  a  parcel  of  gold  nobles,  for  ex- 
ample, they  gave  one  silver  penny  less  for  each  noble 
than  its  current  value,  and  when  they  gave  gold 
nobles,  for  example,  they  gave  one  silver  penny  less 
for  each  noble  than  its  current  value,  and  when  they 
gave  gold  nobles  for  silver  coins  they  took  one  penny 
more,  or  6s.  9d.  for  each  noble,  by  w^hich  in  every 
transaction,  they  made  a  profit  of  1 1-5  per  cent. 

These  royal  exchangers  had  also  the  exclusive 
privilege  of  giving  the  current  coins  of  the  kingdom 
in  exchange  for  foreign  coins,  to  accommodate  mer- 
chant-strangers, and  of  purchasing  light  money  for 
the  use  of  the  mint.  As  several  laws  were  made 
against  exporting  English  coin,  the  king's  ex- 
changers at  the  several  seaports  furnished  merchants 
and  others  who  were  going  beyond  seas  with  the 
coins  of  the  countries  to  w^hich  they  were  going. 


HISTORY  OF  BANKING  896 

in  exchange  for  English  money,  according  to  a  table 
which  hung  up  in  their  office  for  public  inspection. 
By  these  various  operations  they  made  considerable 
profits,  of  which  the  king  had  a  certain  share.  The 
house  in  which  the  royal  exchanger  of  any  town 
kept  his  office  was  called  the  Exchange,  from  which 
it  is  probable  the  public  structures  where  merchants 
meet  for  transacting  business  derive  their  name." 

Re-established  by  Charles  I.— This  institution  con- 
tinued until  the  middle  of  the  reign  of  Henry  Vni, 
when  it  fell  into  disuse.  It  was  re-established  in 
1627,  by  Charles  I,  who  then  issued  the  following 
proclamation : — 

*' Whereas  the  exchange  of  all  manner  of  gold  and 
silver  current  in  moneys  or  otherwise,  as  the  buying, 
selling  and  exchanging  of  all  manner  of  bullion,  in 
species  of  foreign  coins,  billets,  ingots,  etc.,  fine  re- 
fined, or  alloyed  howsoever,  being  fit  for  our  mint, 
hath  ever  been  and  ought  to  be  our  sole  right,  as  part 
of  our  prerogative  royal  and  ancient  revenue,  where- 
in none  of  our  subjects  of  whatever  trade  or  quality 
soever,  ought  at  all,  without  any  special  license,  to 
intermeddle,  the  same  being  prohibited  by  divers 
Acts  of  Parliament  and  Proclamations,  both  ancient 
and  modem. 

**And  whereas  ourself  and  divers  of  our  royal 
predecessors  have,  for  some  time  past,  tolerated  a 
promiscuous  kind  of  liberty  to  all,  but  especially  to 
some  of  the  mystery  and  trade  of  goldsmiths  in  Lon- 
don and  elsewhere,  not  only  to  make  the  said  ex- 
changes, but  to  buy  and  sell  all  manner  of  bullion, 
and  from  thence  some  of  them  have  grown  to  that 


396  BANKING,  CREDIT  AND  FINANCE 

licentiousness,  that  they  have  for  divers  years  pre- 
sumed, for  their  private  gain,  to  sort  and  weigh  all 
sorts  of  money  current  within  our  realm,  to  the  end 
to  cull  out  the  old  and  new  moneys,  which,  either  by 
not  wearing  or  by  any  other  accident,  are  weightier 
than  the  rest,  which  weightiest  moneys  have  not 
only  been  molten  down  for  the  making  of  plates, 
etc.,  but  even  traded  in  and  sold  to  merchant- 
strangers,  etc.,  who  have  exported  the  same,  whereby 
the  consumption  of  coins  has  been  greatly  occasion- 
ed, as  also  the  raising  of  the  silver  even  of  our  own 
moneys  to  a  rate  above  what  they  are  truly  current 
for,  by  reason  whereof  no  silver  can  be  brought  up 
to  oiu*  mint  but  to  the  loss  of  the  bringers,  etc. 

*^For  the  reforming  of  all  which  abuses  we  have, 
by  the  advice  of  our  Privy  Council,  determined  to  as- 
sume our  said  right,  for  our  own  profit  and 
the  good  of  the  realm,  and  for  this  end  we  do  now 
appoint  Henry,  Earl  of  Holland,  and  his  deputies, 
to  have  the  office  of  our  changes,  exchangers,  and 
outchanges  whatsoever,  in  England,  Wales,  and  Ire- 
land. And  we  do  hereby  strictly  charge  and  com- 
mand that  no  goldsmith  nor  other  person  whatso- 
ever, other  than  the  said  Earl  of  Holland,  do  pre- 
sume to  change,  etc. 

The  King's  Prerogative.— As  this  measure  occa- 
sioned some  dissatisfaction,  the  king  authorized,  in 
the  following  year,  the  publication  of  a  pamphlet, 
entitled  "Cambium  Regis,  or  the  Office  of  his 
Majesty's  Exchanger  Royal."  In  this  pamphlet  it 
was  attempted  to  be  shown: — 

*'That  the  prerogative  of  exchange  of  bullion  for 


HISTORY  OF  BANKING  397 

coin  has  always  been  a  flower  of  the  Crown,  of  which 
instances  are  quoted  from  the  time  of  King  Henry 
I  downward.  That  King  John  farmed  out  that  (jffice 
for  no  smaller  a  sum  than  five  thousand  marks — that 
the  place  or  office  where  the  exchange  was  made  in 
his  reign  was  near  St.  PauPs  Cathedral  in  London, 
and  gave  name  to  the  street  still  called  the  Old 
'Change — that  in  succeeding  reigns  there  were  sever- 
al other  places  for  those  exchangers  besides  London 
— that  this  method  continued  to  Henry  the  Eighth's 
times,  who  suffered  his  coin  to  be  so  far  debased  that 
no  regular  exchange  could  be  made — that  the  same 
confusion  made  way  for  the  London  goldsmiths  to 
leave  off  their  proper  trade  of  goldsmithrie,  i,  e.,  the 
working  and  selling  of  new  gold  and  silver  plate, 
and  manufacture,  the  sole  intents  of  all  their  char- 
ters, and  to  turn  exchangers  of  plate  and  foreign 
coins  for  our  English  coins,  although  they  had  no 
right  to  buy  any  gold  or  silver  for  any  other  purpose 
than  for  their  manufacture  aforesaid,  neither  had 
any  person  but  those  substituted  by  the  Crown  a 
right  to  buy  the  same. 

"The  king,  therefore,  has  now  resumed  this  office, 
not  merely  to  keep  up  his  right  so  to  do,  but  likewise 
to  prevent  those  trafficking  goldsmiths  from  culling 
and  sorting  all  the  heavy  coin,  and  selling  the  same 
to  the  mint  of  Holland,  which  gained  gi^eatly  there- 
by, or  else  by  melting  those  heavy  coins  down  for 
making  of  plate,  witness  the  pieces  of  thirteenpence- 
halfpenny,  old  shillings  of  Queen  Elizabeth,  nine- 
penny  and  f ourpenny-halfpenny  pieces,  which,  being 
weighty  moneys,  none  of  them  were  now  to  be  met 
with,  whereby  they  have  raised  the  price  of  silver 


3S»  BANKING,  CREDIT  AND  FINANCE 

to  two-pence  per  ounce  a])ove  the  value  of  the  mint, 
which  thereby  has  stood  still  ever  since  the  eleventh 
year  of  King  James — that  for  above  thirty  years 
past  it  has  been  the  usual  practice  of  those  exchang- 
ing goldsmiths  to  make  their  servants  run  every 
morning  from  shop  to  shop  to  buy  up  all  weighty 
coins  for  the  mints  of  Holland  and  the  East  countries, 
whereby  the  king's  mint  has  stood  still." 

Not  only  the  Goldsmiths'  Company  of  London, 
])ut  the  lord  mayor,  court  of  aldermen,  and  common 
(council,  petitioned  against  the  revival  of  the  office  of 
the  Royal  Exchanger,  says  J.  W.  (iill)art  in  his  His- 
tory of  Banking.  They  were  not,  however,  success- 
ful; and  on  a  second  application  of  the  Goldsmiths' 
Company,  the  king  told  them  "to  trouble  him  no 
farther,  since  his  right  to  the  office  was  undoubtedly 
cle<ar."  After  the  death  of  Charles  I.  however,  this 
office  was  not  continued,  and  the  business  of  money- 
changing  fell  again  into  the  hands  of  the  goldsmiths. 

Money-Lending. — That  part  of  the  business  of 
banking  which  consists  in  the  lending  of  money  was 
conducted  during  the  Middle  Ages  under  severe  re- 
straints. The  taking  of  interest  for  the  loan  of  money 
was  deemed  sinful,  and  stigmatized  with  the  name 
of  usury.  This  opinion  appears  to  be  wholly  unwar- 
ranted, either  by  the  principles  of  natural  equity  or 
the  enactments  of  the  Mosaic  law. 

Michaelis  says  in  his  Commentai'ies  on  the  Laws 
of  Moses:  "That  taking  of  interest  from  Israelites 
wae  forbidden  by  Moses;  not,  however,  as  if  he  ab- 
solutely and  in  all  cases  condemned  the  practice,  for 
he  expressly  permitted  interest  to  be  taken  from 


HISTORY  OF  BANKING  399 

strangers,  but  out  of  favor  to  the  poorer  classes  of 
the  people.  The  farther  we  go  back  towards  the 
origin  of  nations,  the  poorer  do  we  commonly  find 
them,  and  the  more  strangers  to  commerce;  and 
where  this  is  the  case,  people  borrow,  not  with  a 
view  to  profit,  but  from  poverty,  and  in  order  to  pro- 
cure the  necessaries  of  life;  and  there  it  must  be,  no 
doubt,  a  great  hardship  to  give  back  more  than  has 
been  gotten.  The  taking  of  interest  from  strangers, 
Moses  has  not  only  nowhere  forbidden,  but  even  ex- 
pressly authorized.  Hence  it  is  clear  that  he  does  by 
no  means  represent  interest  as  in  itself  sinful  and 
unjust.  Any  such  prohibition  of  interest  in  our  age 
and  country  would,  without  doubt,  be  unjust  towards 
lenders,  and  destructive  to  trade  of  every  descrip- 
tion. Among  all  the  remnants  of  ancient  laws,  it 
would  be  difficult  to  find  one  which,  in  the  present 
state  of  society,  it  would  be  more  foolish  and  hurt- 
ful to  revive  and  enforce.  It  would  only  suit  a  state 
so  constituted  as  was  that  of  the  Israelites  by  Moses." 

Early  Rates  of  Interest. — The  taking  of  interest 
for  the  loan  of  money  was  first  prohibited  in  Eng- 
land by  Edward  the  Confessor.  This  law,  however, 
appears  to  have  become  obsolete;  for,  in  a  council 
held  at  Westminster,  in  the  year  1126,  usury  was 
prohibited  only  to  the  clergy,  who,  in  case  they  prac- 
ticed it,  were  to  be  degraded;  and  in  another  Council, 
held  twelve  years  afterwards,  it  was  decreed  that, 
*'such  of  the  clergy  as  were  usurers  and  hunters 
after  sordid  gain,  and  for  the  public  employments 
of  the  laity,  ought  to  be  degraded." 

The  earliest  mention  in  English  history  of  a  cer- 
tain yearly  allowance  for  the  usm-y  or  interest  of 


400  BANKING,  CREDIT  AND  FINANCE 

money,  is  in  the  year  1199,  the  tenth  and  last  year  of 
Richard  I.  In  this  case  the  rate  of  interest  was  10 
per  cent.  This  appears  to  have  been  the  ordinary  or 
market-rate  of  interest  from  that  i)eriod  until  the 
time  of  Henry  VIII,  but  there  are  many  instances 
on  record  of  a  much  higher  rate  of  interest  being- 
taken,  especially  by  the  Jews  and  the  Lombards, 
who,  in  those  times,  were  the  principal  money- 
lenders. The  exorbitant  interest  taken  by  them  is 
supposed  b}"  eminent  writers  to  have  been  the  effect 
of  the  prohibition  of  usury. 

The  Jew^s,  who  were  previously  famous  in  foreign 
countries  for  their ' '  egregious  cunning  in  trade  and  in 
the  practice  of  brokerage,"  arrived  in  England  about 
the  time  of  the  Norman  Conquest  (1066)  and  soon  be- 
came remarkable  for  wealth  and  usury.  ''The  prej- 
udices of  the  age,"  says  Hume,  ''had  made  the  lend- 
ing of  money  on  interest  pass  by  the  in\idious  name 
of  usury;  yet  the  necessity  of  the  practice  had  still 
continued  it,  and  the  greater  part  of  that  kind  of 
dealing  fell  everywhere  into  the  hands  of  the  Jews. 
The  industry  and  frugality  of  this  people  had  put 
them  in  possession  of  all  the  ready  money,  which 
the  idleness  and  profusion  common  to  the  English 
with  the  European  nations  enabled  them  to  lend  at 
exorbitant  and  unequal  interest." 

Henry  III  prohibited  the  Jew^s  taking  more  than 
twopence  a  week  for  every  20  shillings  they  lent  to 
the  scholars  at  Oxford.  This  is  at  the  rate  of  £43  6s. 
8d.  per  cent  per  annum.  Peter  of  Blois,  Ai'chdeacon 
of  Bath,  wrote  thus  to  his  friend  the  Bishop  of  Ely : 
"I  am  dragged  to  Canterbury  to  be  crucified  by  the 


HISTORY  OF  BANKING  401 

perfidious  Jews  amongst  their  other  debtors,  whom 
they  ruin  and  torment  with  usury.  The  same  suf- 
ferings await  me  also  at  London,  if  you  do  not 
mercifully  interpose  for  my  deliverance.  I  beseech 
you,  therefore,  O  most  Rev.  Father  and  most  loving 
friend,  to  become  bound  to  Samson  the  Jew  for  £6 
which  I  owe  him,  and  thereby  deliver  me  from  that 
cross." 

Expulsion  of  the  Jews. — The  wealth  and  the  rapac- 
ity of  the  Jews  occasioned  the  most  cruel  proceed- 
ings against  them  on  the  part  of  both  the  populace 
and  the  Government.  These  persecutions  terminated 
by  their  expulsion  from  England  in  the  year  1290. 
They  were  not  admitted  until  the  time  of  Oliver 
Cromwell. 

On  this  occasion  the  Protector  summoned  an  as- 
sembly to  debate  two  questions:  First,  whether  it 
were  lawful  to  tolerate  the  Jews;  Second,  if  it  were, 
on  what  conditions  ?  The  assembly  consisted  of  two 
judges,  seven  citizens  of  London,  among  whom  were 
the  lord  mayor  and  the  sheriffs,  and  fourteen  divines. 
The  judges  considered  toleration  merely  as  a  point 
of  law,  and  declared  they  knew  of  no  law  against  it, 
and  that  if  it  were  thought  useful  to  the  State,  they 
would  advise  it.  The  citizens  viewed  it  in  a  commer- 
cial light,  and  they  were  divided  in  their  opiuion 
about  its  utility.  Both  these,  however,  despatched 
the  matter  briefly;  but  the  divines  violently  opposed 
it  by  text  after  text  for  four  whole  days.  Cromwell 
was  at  length  so  weary  that  he  told  them  he  had 
hoped  they  would  have  thrown  some  light  on  the 


402  BANKING,  CREDIT  AND  FINANCE 

subject  to  direct  his  conscience  but,  on  the  contrary, 
they  had  rendered  it  more  obscure  and  doubtful  than 
before;  that  he  desired,  therefore,  no  more  of  their 
reasonings,  but  lest  he  should  do  anything  rashly, 
he  begged  a  share  in  their  prayers. 

The  Lombards  as  Usurers. — Previous  to  the  ex- 
pulsion of  the  Jews,  the  Lombards  had  settled  in 
England,  and  they  soon  became  as  great  usurers  as 
the  Jews  themselves.  By  Lombards  were  generally 
understood  Italian  merchants  from  the  four  republics 
of  Genoa,  Lucca,  Florence,  and  Venice. 

The  foreign  commerce  of  those  times  was  usually 
carried  on  by  companies  of  merchants  who,  on  pay- 
ment of  certain  duties,  were  invested  by  the  Govern- 
ment with  a  monopoly  of  the  trade  to  those  countries 
of  which  they  were  natives,  and  they  also  possessed 
peculiar  privileges. 

**As  the  Lombards  engrossed  the  trade  of  every 
kingdom  in  which  they  settled,  they  soon  became 
masters  of  its  cash.  Money,  of  course,  was  in  their 
hands  not  only  a  sign  of  the  value  of  their  commod- 
ities, but  became  an  object  of  commerce  itself.  They 
dealt  largely  as  bankers.  Li  an  ordinance,  A.  D. 
1295,  we  find  them  styled  ^mercatores'  and  'camp- 
sores.'  They  carried  on  this,  as  well  as  other 
branches  of  their  commerce,  with  somewhat  of  that 
rapacious  spirit  which  is  natural  to  monopolizers 
who  are  not  restrained  by  the  competition  of  rivals. 
An  opinion  which  prevailed  in  the  Middle  Ages  was, 
however,  in  some  measure  the  cause  of  their  exorbi- 
tant demands,  and  may  be  pleaded  in  apology  for 
them. 


HISTORY  OF  BANKING  403 

"Commerce  camiot  be  carried  on  with  advantage 
unless  the  persons  who  lend  a  sum  are  allowed  a 
certain  premium  for  the  use  of  their  money,  as  a 
compensation  for  the  risk  which  they  run  in  permit- 
ting another  to  traffic  with  their  stock.    This  pre- 
mium is  fixed  by  law  in  all  commercial  countries,  and 
is  called  the  legal  interest  of  money.    But  the  Fa- 
thers of  the  Church  absurdly  applied  the  prohibi- 
tions of  usury  in  Scripture  to  the  payment  of  legal 
interest,  and  condemned  it  as  a  sin.    The  schoolmen, 
misled  by  Aristotle,  whose  sentunents  they  f  ollowed^ 
implicitly  and  without  examination  adopted  the  same 
error  and  enforced  it.     Thus  the  Lombards  found 
themselves  engaged  in  a  traffic  which  was  deemed 
criminal  and  odious.    They  were  liable  to  punishment 
if  detected.    They  were  not  satisfied,  therefore,  with 
that  moderate   premium  which   they  might  have 
claimed,  if  their  trade  had  been  open  and  authorized 
by  law.     They  exacted  a  sum  proportional  to  the 
danger  and  infamy  of  a  discovery.    Accordingly  we 
find  it  was  usual  for  them  to  demand  twenty  per  cent 
for  the  use  of  money  in  the  thirteenth  century. 

"About  the  beginning  of  that  century  the  Count- 
ess of  Flanders  was  obliged  to  borrow  money  in  or- 
der to  pay  her  husband's  ransom.  She  procured 
the  sum  requisite,  either  from  Italian  merchants  or 
from  Jews.  The  lowest  interest  which  she  paid  to 
them  was  above  twenty  per  cent,  and  some  of  them 
exacted  near  thirty.  In  the  fourteenth  century,  A. 
D.  1311,  Phillip  IV  fixed  the  interest  which  might 
be  legally  exacted  in  the  fairs  of  Champagne  at 
twenty  per  cent.  The  interest  of  money  in  Arragon 
was  somewhat  lower.    James  I  in  A.  D.  1242,  fixed 


404  BANKING,  CREDIT  AND  FINANCE 

it  by  law  at  eighteen  per  cent.  As  late  as  the  year 
1490,  it  appears  that  the  interest  of  money  in  Pia- 
cenza  was  at  the  rate  of  forty  per  cent.  This  is  the 
more  extraordinary,  because  at  that  time  the  com- 
merce of  the  Italian  States  was  become  considerable. 

**It  appears  from  Lud.  Guicciardini  that  Charles 
V  had  fixed  the  rate  of  interest  in  his  dominions  in 
the  Low  Countries  at  twelve  per  cent,  and  at  the 
time  when  he  wrote,  about  the  year  1560,  it  was  not 
uncommon  to  exact  more  than  that  sum.  He  com- 
plains of  this  as  exorbitant,  and  points  out  its  bad 
effects  both  on  agriculture  and  connnerce.  This 
high  interest  on  money  is  alone  a  proof  that  the  prof- 
its on  commerce  were  exorbitant.  The  Lombards 
were  also  established  in  England  in  the  thirteenth 
century,  and  a  considerable  street  in  the  city  of  Lon- 
don still  bears  their  name.  They  enjoyed  great  privi- 
leges, and  carried  on  an  extensive  commerce,  particu- 
larly as  bankers."  (Robertson's  History  of  Char- 
les V.) 

The  English  monarchs  frequently  borrowed  money 
of  the  Lombards,  as  well  as  of  other  public  bodies 
and  of  private  individuals.  The  companies  of  foreign 
merchants  made  advances  of  money,  which  were  re- 
paid by  the  duties  on  their  merchandise.  The  oldest 
and  wealthiest  of  these  companies,  the  Steel- Yard 
Company,  was  a  kind  of  bank  to  the  English  kings, 
whenever  they  wanted  money  on  any  sudden  emerg- 
ency, but  the  company  was  sure  to  be  well  paid  in 
the  end  for  such  assistance. 

Interest  Made  Legal.— In  the  year  1546,  the  taking 
of  interest  for  money  was  made  legal  in  England, 


HISTORY  OP  BANKING  405 

and  the  rate  was  fixed  at  ten  per  cent.  This  Act  was 
repealed  in  the  year  1552,  but  it  was  re-enacted  in 
1571.  The  legal  rate  of  interest  was  reduced  to  eight 
per  cent  in  1624,  and  to  six  per  cent  in  1651.  In  the 
year  1714  it  was  reduced  to  five  per  cent.  After  the 
taking  of  interest  was  sanctioned  by  law,  the  term 
usuiy,  which  was  previously  applied  to  interest  in 
general,  became  limited,  to  denote  a  rate  of  interest 
higher  than  that  which  the  law  allowed. 

Money-Borrowing.— That  part  of  the  business  of 
banking  which  consists  in  the  borrowing  of  money, 
with  a  view  of  lending  it  again  at  a  higher  mte  of 
interest,  does  not  appear  to  have  been  carried  on  by 
bankers  until  the  year  1645,  when  a  new  era  oc- 
curred in  the  history  of  banking.  The  goldsmiths, 
who  were  previously  only  money-changers,  now  be- 
came also  money-lenders.  They  became  also  money 
boiTOwers,  and  allowed  interest  on  the  sums  they 
borrowed.  They  were  agents  for  receiving  rents. 
They  lent  money  to  the  king  on  the  security  of  the 
taxes.  The  receipts  they  issued  for  the  money  lodged 
at  their  houses  circulated  from  hand  to  hand,  and 
were  known  by  the  name  of  "goldsmiths'  notes." 
These  may  be  considered  as  the  first  kind  of  bank 
notes  issued  in  England.  The  following  account  of 
these  banking  goldsmiths  as  given  byGilbaii;,istaken 
chiefly  from  Anderson's  "History  of  Conmierce." 

When  the  English  merchants  became  enriched  by 
commerce,  they  wished  for  a  place  of  security  in 
which  they  might  deposit  their  wealth.  Hence  they 
usually  sent  their  money  to  the  mint  in  the  Tower 
of  London,  w^hich  became  a  sort  of  banlv.  The  mer- 
chants left  their  money  there  when  they  had  no  oc- 


406  BANKING,  CREDIT  AND  FINANCE 

casion  for  it,  and  drew  it  out  as  thoy  wanted  it.  But 
in  1(>40,  Kin--  Charles  1  took  possession  uf  £'200,00) 
of  the  merchants'  money  that  had  been  lodged  in  the 
mint  and  ironi  that  period  the  merchants  kept  their 
money  in  their  own  houses,  under  the  care  of  theii- 
servants  and  apprentices.  On  the  Ijreakin^  out  of 
the  civil  war  between  Charles  I  and  the  parliament, 
it  became  very  customaiy  for  the  ap])rentices  to  rob 
their  masters,  and  then  run  away  and  join  the  army. 
As  the  merchants  could  now  place  no  confidenct; 
either  in,  the  public  authorities  or  in  their  own 
servants,  they  were  under  the  necessity  of  employ- 
ing bankers. 

The  Banking  G-oldsmiths. — These  bankers  were 
the  goldsmiths.  Previous  to  this  period,  the  busi- 
ness of  the  goldsmith  was  similar  to  what  it  is  in  our 
own  time.  They  bought  and  sold  plate  and  foreign 
coins;  they  prociu'ed  gold  to  be  coined  at  the  mint, 
and  supplied  refiners,  plate-makers,  and  others 
with  the  precious  metals.  To  deal  in  gold  and  silver 
bullion  to  any  large  extent  implies  the  possession 
of  considerable  wealth;  and  as  all  the  money  in  the 
country  then  consisted  of  gold  and  silver  coin,  it  was 
natural  enough  that  the  goldsmiths  should  become 
the  bankers  of  those  who  had  money  for  which  they 
had  no  immediate  use. 

An  account  of  the  bankers  of  those  days  is  related 
in  a  curious  pamphlet,  published  in  the  year  1676, 
and  entitled,  "The  Mystery  of  the  New-fashioned 
Goldsmiths;  or  Bankers  Discovered.''  The  author 
says:  "This  new  banking  business  soon  grew  very 
considerable.  It  happened  in  those  times  of  civil 
commotion,  that  the  Parliament,  out  of  plates  and 


HISTORY  OF  BANKING  407 

old  coins  brought  into  the  mint,  coined  seven  mil- 
lions into  half-crowns;  and  there  being  no  mills  then 
in  use  at  the  mint,  this  new  money  was  of  a  very 
unequal  weight,  sometimes  twopence  and  three- 
pence difference  in  an  ounce,  and  most  of  it  was,  it 
seems,  heavier  than  it  ought  to  have  been  in  propor- 
tion to  the  value  in  foreign  parts.  Of  this  the  gold- 
smiths made  naturally  the  advantage  usual  in  such 
cases,  by  picking  out  or  culling  the  heaviest,  and 
melting  them  down  and  exporting  them. 

*' Moreover,  such  merchants'  servants  as  still  kept 
their  masters'  running  cash,  had  fallen  into  a  way  of 
clandestinely  lending  the  same  to  the  goldsmiths  at 
fourpence  per  cent  per  diem,  who,  by  these  and  such- 
like means,  were  enabled  to  lend  out  great  quanti- 
ties of  cash  to  necessitous  merchants  and  others, 
weekly  or  monthly,  at  high  interest,  and  also  began 
to  discount  the  merchants'  bills  at  the  like  or  higher 
interest. 

**Much  about  the  same  time,  the  goldsmiths  (or 
new-fashioned  bankers)  began  to  receive  the  rents 
of  gentlemen's  estates  remitted  to  town,  and  to  al- 
low them  and  others  who  put  cash  in  their  hands 
some  interest  for  it,  if  it  remained  but  a  single  month 
in  their  hands,  or  even  a  lesser  time.  This  was  a 
great  allurement  for  people  to  put  money  into  their 
hands,  which  would  bear  interest  till  the  day  they 
wanted  it;  and  they  could  also  draw  it  out  by  one 
hundred  pounds  or  fifty  pounds,  etc.,  at  a  time  as 
they  wanted  it,  with  infinitely  less  trouble  than  if 
they  had  lent  it  out  on  either  real  or  personal 
security. 


408  BANKING,  CREDIT  AND  FINANCE 

"The  consequence  was,  that  it  quickly  brought  a 
great  quantity  of  cash  into  their  hands,  so  that  the 
chief  or  greatest  of  them  were  now  enabled  to  sup- 
ply Cromwell  with  money  in  advance,  on  the  reve- 
nues, as.his  occasion  required,  upon  great  advantages 
to  themselves. 

'*  After  the  Restoration,  King  Charles  11  being  in 
want  of  money,  the  bankers  took  ten  per  cent  of  him 
barefacedly  and  by  private  contracts;  on  many  bills, 
orders,  tallies,  and  debts  of  that  king,  they  got 
twenty,  sometimes  thirty  per  cent,  to  the  great  dis- 
honor of  the  government. 

''This  great  gain  induced  the  goldsmiths  more  and 
more  to  become  lenders  to  the  king,  to  anticipate  all 
the  revenue,  to  take  every  gi^ant  of  Parliament  into 
pawn  as  soon  as  it  was  given;  also  to  outvie  each 
other  in  buying  and  taking  to  pawn  bills,  orders 
and  tallies,  so  that  in  effect  all  the  revenue  passed 
through  their  hands." 

Blamed  for  Money  Scarcity. — The  "new-fash- 
ioned bankers"  were  also  attacked  by  Sir  Josiah 
Child,  in  his  "New  Discourse  of  Trade,"  in  the  fol- 
lowing terms: 

"And  principally  this  seeming  scarcity  of  money 
proceeds  from  the  trade  of  banking,  which  obstructs 
circulation,  advanceth  usury,  and  renders  it  so  easy, 
that  most  men,  as  soon  as  they  can  make  up  a 
sum  of  from  £50  to  £100,  send  it  in  to  the  goldsmith, 
which  doth  and  will  occasion,  w^hile  it  lasts,  that 
fatal  pressing  necessity  for  money  visible  through- 
out the  whole  kingdom,  both  to  prince  and  people. 


HISTORY  OF  BANKING  400 

"A  seventh  accidental  reason  why  land  doth  not 
sell  at  present  at  the  rate  it  naturally  should  in  pro- 
portion to  the  legal  interest,  is  that  innovated  prac- 
tice of  bankers  in  London,  which  hath  more  effects 
attending  it  than  most  I  have  conversed  with  have 
yet  observed;  but  I  shall  here  take  notice  of  that 
only  which  is  to  my  present  purpose,  viz: — 

*'The  gentlemen  that  are  bankers,  havmg  a  large 
interest  from  his  Majesty  for  what  they  advance 
upon  his  Majesty's  revenue,  can  afford  to  give  the 
full  legal  interest  to  all  persons  that  put  money  into 
their  hands,  though  for  never  so  short  or  long  a  time, 
which  makes  the  trade  of  usury  so  easy  and  hitherto 
safe,  that  few,  after  having  found  the  sweetness  of 
this  lazy  way  of  improvement  (being  by  continu- 
ance and  success  grown  to  fancy  themselves  secure 
in  it),  can  be  led  (there  being  neither  ease  nor  profit 
to  invite  them)  to  lay  out  their  money  in  land, 
though  at  fifteen  years'  purchase;  whereas  before 
this  way  of  private  banking  came  up,  men  who  had 
money  were  forced  oftentimes  to  let  it  lie  dead  by 
them  until  they  could  meet  with  securities  to  their 
minds,  and  if  the  like  necessity  were  now  of  money 
lying  dead,  the  loss  of  use  for  the  dead  time  being 
deducted  from  the  profit  of  six  per  cent  (communi- 
bus  annis)  would  in  effect  take  off  £1  per  cent  per 
annum  of  the  profit  of  usury,  and  consequently  in- 
cline men  more  to  purchase  lands,  because  the  differ- 
ence betw^een  usury  and  purchasing  would  not,  in 
point  of  profit,  be  so  great  as  now  it  is,  this  new  in- 
vention of  cashiering  having,  in  my  opinion,  clearly 
bettered  the  usurer's  trade  one  or  two  per  cent  per 
annum.    And  that  this  way  of  leaving  money  with 


410  BANKING,  CREDIT  AND  FINANCE 

goldsmiths  hath  had  the  aforesaid  effect,  seems  evi- 
dent to  me  from  the  scarcity  it  makes  of  money  in 
the  country;  for  the  trade  of  bankers  being  only  in 
London,  doth  very  much  drain  the  ready  money 
from  all  other  parts  of  the  kingdom." 

The  First  Run  on  a  Bank. — In  the  year  1667  oc- 
curred the  first  "run"  of  which  we  have  any  ac- 
count in  the  history  of  banking.  The  business  of  the 
new-fashioned  bankers  had  increased  so  fast,  and 
they  had  become  so  numerous,  that  their  trade  w^as 
supposed  to  be  at  its  height  in  this  year;  when,  dur- 
ing the  time  that  a  treaty  of  peace  was  under  con- 
sideration, the  Dutch  fleet  sailed  up  the  Thames, 
blew  up  the  fort  of  Sheerness,  set  fire  to  Chatham, 
and  burned  four  ships  of  the  line.  This  disaster  oc- 
casioned great  alarm  in  London,  particularly  among 
those  who  had  money  in  their  bankers'  hands,  as  it 
was  imagined  that  the  king  would  not  be  able  to 
repay  the  bankers  the  money  they  had  lent  him. 
To  quiet  the  fears  of  the  people,  the  king  issued  a 
proclamation,  declaring  that  the  payments  to  the 
bankers  should  be  made  at  the  Exchequer  the  same 
as  usual. 

La  1672,  five  years  afterwards,  a  much  greater 
calamity  befell  the  bankers;  for  King  Charles  U 
shut  up  the  Exchequer,  and  would  not  pay  the 
bankers  either  the  principal  or  the  interest  of  the 
money  which  he  had  borrowed.  The  amount  then 
due  by  the  king  was  £1,328,526,  which  he  had  bor- 
rowed of  the  bankers  at  eight  per  cent,  and  which 
he  never  repaid. 

The  mode  in  which  the  bankers  transacted  their 


HISTORY  OF  BANKING  411 

loans  with  the  king  was  this:  As  soon  as  the  parlia- 
ment had  voted  to  the  king  certain  sums  of  money 
out  of  particular  taxes,  the  bankers  advanced  at  once 
the  money  voted  by  parliament,  and  were  repaid  in 
weekly  payments  at  the  Exchequer  as  the  taxes  were 
received.  The  mode  of  making  the  payments  and 
the  rate  of  interest  were  agreed  upon  at  the  time 
of  making  the  loan. 

^  The  shutting  up  of  the  Exchequer  occasioned  great 
distress  among  all  classes  of  people.  Persons  not 
in  trade  had  then  no  way  of  employing  their  money 
with  advantage  but  by  placing  it  out  at  interest  in 
the  hand^  of  a  banker.  Hence,  not  merchants  only, 
but  widows,  orphans,  and  others,  became  suddenly 
deprived  of  the  whole  of  their  property.  They  came 
in  crowds  to  the  bankers,  but  could  obtain  neither 
the  principal  nor  the  interest  on  the  money  they  had 
deposited.  The  clamor  became  so  great  that  the 
king  granted  a  patent  to  pay  six  per  cent  interest 
out  of  his  hereditary  excise;  but  he  never  paid  the 
principal  But,  about  forty  years  afterward,  the 
parliament  made  arrangements  by  which  the  debt 
was  assumed  to  be  discharged;  that  is,  it  became  a 
part  of  the  National  Debt,  but  the  creditors  received 
nothing. 

The  business  of  banking  remained  entirely  in  the 
hands  of  the  **  new-fashioned"  bankers  until  the  es- 
tablishment of  the  Bank  of  England,  in  the  year 
1694. 

TraBfJinission  of  Money. — The  transmission  of 
money  was  in  ancient  times  effected  by  sending  a 
messenger  with  the  coin.    During  the  Mddle  Ages, 


412  BANKING,  CREDIT  AND  FINANCE 

it  was  accomplished  by  means  of  bills  of  exchange, 
which  were  purchased  by  merchants.  Ultimately,  a 
special  class  of  persons  carried  on  this  kind  of 
traffic,  and  purchased  or  sold  bills  to  suit  the  con- 
venience of  parties  who  wished  to  deal  with  them. 
The  pecuniary  transactions  of  independent  nations 
are  still  adjusted  in  the  same  way.  But  the  trans- 
mission of  money  from  one  part  of  the  country  to 
another  part,  is  more  frequently  effected  upon  the 
principle  of  transfers,  without  the  passing  of  any 
bills.  This  branch  of  banking  is  fully  dealt  with 
elsewhere  in  this  volume. 

The  Bank  of  England. — Previous  to  the  year  1694 
there  were  only  four  banks  of  any  great  consequence 
in  Europe,  but  on  the  27th  of  July  of  that  year  a 
charter  was  granted  by  the  reigning  sovereigns, 
William  and  Mary,  for  establishing  the  Bank  of  Eng- 
land, which  for  opulence,  importance,  and  extent  of 
circulation  became  the  greatest  in  the  world. 

The  object  of  the  promoters  was  to  raise  money 
for  the  use  of  the  government.  When  the  scheme 
was  brought  before  the  parliament,  it  caused  a  long 
and  violent  discussion.  One  party  dwelt  upon  the 
national  advantages  that  would  accrue  from  such  a 
measure.  They  said  it  would  rescue  the  nation  out 
of  the  hands  of  extortioners  and  usurers,  lower  the 
rates  of  interest,  raise  the  value  of  land,  revive  and 
establish  public  credit,  extend  the  circulation,  and 
consequently  improve  commerce,  facilitate  the  an- 
nual supplies  for  the  national  expenses,  and  connect 
the  people  more  closely  with  the  government. 

The  opposition  party  declared  that  such  a  bank 


HISTORY  OF  BANKING  413 

would  become  a  monopoly  and  engross  the  whole 
money  of  the  kingdom;  that  it  must  infallibly  be- 
come subservient  to  government  views,  and  might 
be  employed  for  the  worst  purposes  of  arbitrary 
power;  that  instead  of  assisting,  it  would  weaken 
commerce,  by  tempting  people  to  withdraw  their 
money  from  trade  and  employ  it  in  stock-jobbing; 
that  it  would  produce  a  swarm  of  brokers  and  job- 
bers to  prey  upon  their  fellow-creatures,  encourage 
fraud  and  gambling,  and  thus  corrupt  the  morals  of 
the  nation. 

Notwithstanding  these  objections,  the  Act  passed 
both  houses  of  parliament,  and  received  the  royal 
assent. 

Opposition    of    Foreign    Competitors. — It    was 

noticed  that  foreign  competitors  for  English  trade 
strongly  opposed  the  project,  and  not  long  after  the 
bank  had  been  established.  Bishop  Burnet  wrote: 
*'The  advantages  the  king  and  all  concerned  in  tallies 
had  from  the  bank  w^ere  soon  so  sensibly  felt  that 
all  people  saw  into  the  secret  reasons  that  made  th(i 
enemies  of  the  constitution  set  themselves  with  so 
much  earnestness  against  it." 

In  the  English  Exchequer,  the  '' tallies '*  referred 
to  by  Bishop  Burnet  were  long  used  in  lieu  of  cer- 
tificates of  indebtedness  to  creditors  of  the  state. 
These  tallies  were  seasoned  sticks  of  willow  or  hazel, 
notched  on  the  edge  to  represent  the  amount.  Small 
notches  represented  pence;  larger  notches  shillings, 
and  still  larger,  pounds.  Proportionately  larger  and 
wider  notches  represent  £10,  £100  or  £1000  pounds. 
The  stick  being  then  split  longitudinally,  one  piece 


414  BANKING,  CREDIT  AND  FINANCE 

was  given  to  the  creditor  and  the  other  was  laid  away 
as  a  record.  When  an  account  was  presented  for 
payment,  the  voucher  was  compared  with  the  record. 
When  paid,  the  tally  and  counter-tally  were  tied 
up  together  and  laid  away,  accumulating  for  a  long 
series  of  years.  This  system  was  in  use  until  1812. 
The  tallies  were  received  as  evidence  in  courts  of 
justice. 

The  Act  of  Parliament. — The  act  of  Parliament 
by  which  the  Bank  of  England  was  established  was 
entitled,  "An  Act  for  granting  to  their  Majesties 
several  duties  upon  tonnage  of  ships  and  vessels, 
and  upon  beer,  ale,  and  other  liquors,  for  securing 
certain  recompenses  and  advantages  in  the  said  Act 
mentioned,  to  such  persons  as  shall  voluntarily  ad- 
vance the  sum  of  fifteen  hundred  thousand  pounds 
towards  carrying  on  the  war  with  France."  After  a 
veriety  of  enactments  relative  to  the  '*  duties  upon 
tonnage  of  ships  and  vessels,  and  upon  beer,  ale,  and 
other  liquors, '*  the  Act  authorizes  the  raising  of 
£1,200,000  ($6,000,000)  by  voluntary  subscription, 
the  subscribers  to  be  foi-med  into  a  corporation,  and 
be  styled  "The  Governor  and  Company  of  the  Bank 
of  England."  The  sum  of  £300,000  was  also  to  be 
raised  by  subscription,  and  the  contributors  to  re- 
ceive instead  annuities  for  one,  two,  or  three  lives. 
Towards  the  £1,200,000  no  one  person  was  to  sub- 
scribe more  than  £10,000  before  the  first  day  of  July 
next  ensuing,  nor  at  any  time  more  than  £20,000. 
The  corporation  were  to  lend  their  whole  capital  to 
government,  for  which  they  were  to  receive  interest 
at  the  rate  of  eight  per  cent  per  annum,  and  £4,000 
per  annum  for  management;   being  £100,000  per 


HISTORY  OF  BANKING  415 

annum  in  the  whole.  The  corporation  were  not  al- 
lowed to  borrow  or  owe  more  than  the  amount  of 
their  capital,  and  if  they  did  so  the  individual  mem- 
bers became  liable  to  the  creditors  in  proportion  to 
the  amount  of  their  stock.  The  corporation  were 
not  to  trade  in  any  "goods,  wares,  or  merchandise 
whatsoever;"  but  they  were  allowed  to  deal  in  bills 
of  exchange,  gold  or  silver  bullion,  and  to  sell  any 
goods,  wares,  or  merchandise  upon  which  they  had 
advanced  money,  and  which  had  not  been  redeemed 
within  three  months  after  the  time  agreed  upon. 

Provisions  of  the  Charter. — The  whole  subscrip- 
tion having  been  filled  in  ten  days,  a  charter  was  is- 
sued on  the  27th  day  of  July,  1694.  The  charter 
declares: 

**That  the  management  and  government  of  the 
corporation  be  committed  to  the  governor,  deputy- 
governor,  and  twenty-four  directors,  who  shall  be 
elected  between  the  25th  day  of  March  and  the  25th 
day  of  April  each  year,  from  among  the  members  of 
the  company  duly  qualified. 

**That  no  dividend  shall  at  any  time  be  made  by 
the  said  governor  and  company,  save  only  out  of 
the  interest,  profit,  or  produce  arising  out  of  the 
said  capital,  stock,  or  fund,  or  by  such  dealing  as  is 
allowed  by  Act  of  Parliament. 

"They  must  be  natural-born  subjects  of  England, 
or  naturalized  subjects;  they  shall  have  in  their  own 
name  and  for  their  own  use,  severally,  viz.,  the  gov- 
ernor at  least  £4,000  the  deputy-governor  £3,000,  and 
each  director  £2,000,  of  the  capital  stock  of  the  said 
corporation. 


416  BANKING,  CREDIT  AND  FINANCE 

*'That  thirtoon  or  more  of  tho  said  p^ovcrnors  or  di- 
rectors (of  which  the  j;()Vcrnor  or  deputy-governor 
shall  be  always  one),  shall  constitute  a  court  of  di- 
rectors for  the  management  of  the  affairs  of  the 
company,  and  for  the  api)ointmcnt  of  all  agents  and 
servants  which  may  be  necessary,  ])aying  them 
salaries  as  they  may  consider  reasonable. 

** Every  elector  must  have,  in  his  own  name  and 
for  his  own  use,  £500  or  more,  capital  stock,  and  can 
oidy  give  one  vote;  he  must,  if  required  by  any  mem- 
ber present,  take  the  oath  of  stock,  or  the  declaration 
of  stock  if  it  be  one  of  those  people  called  Quakers. 

**Four  general  courts  to  be  held  in  every  year,  in 
the  months  of  September,  December,  April,  and 
July.  A  general  court  may  be  sunmioned  at  any 
time,  upon  the  requisition  of  nine  proprietors  duly 
qualified  as  electors. 

**The  majority  of  electors  in  general  courts  have 
the  power  to  make  and  constitute  by-laws  and  ordi- 
nances for  the  government  of  the  corporation,  pro- 
vided that  such  by-laws  and  ordinances  be  not  repug- 
nant to  the  laws  of  the  kingdom,  and  be  conformed 
and  approved,  according  to  the  statutes  in  such  case 
made  and  provided." 

The  above  charter,  which  was  originally  granted 
for  ten  years  only,  has  been  subject  to  many  re- 
newals. The  capital  of  the  bank  has  been  vastly 
increased  and  its  operations  have  been  governed  by 
numerous  acts  of  parliament.  It  enjoys  a  wonder- 
ful record  for  wise  and  conservative  management, 
and  is  an  institution  of  which  the  entire  British  Em- 
pire is  justly  proud. 


HISTORY  OF  BANKING  417 

Agents  for  the  Government.— In  1718,  subscrip- 
tions for  government  loans  were  first  received  at  the 
bank,  and  from  this  period  the  British  government 
has  found  it  more  convenient  to  employ  the  bank  as 
its  agents  in  all  operations  of  this  nature,  than  to 
transact  them  at  the  Treasury  or  the  Exchequer. 
The  bank  became  by  degrees  more  closely  connected 
with  the  government,  and  soon  began  to  make  ad- 
vances of  money  in  anticipation  of  the  taxes,  and 
upon  Exchequer  bills  and  other  securities,  by  the  es- 
tablishment of  what  is  now  called  bank  circulation; 
that  is  by  the  issuance  of  secured  notes. 

By  1722,  the  bank  capital  had  increased  by  new 
subscriptions  to  a  total  of  approximately  £9,000,- 
000  or  nearly  $45,000,000.  In  1734,  June  5th,  the  di- 
rectors began  to  transact  business  in  their  new 
house  in  Threadneedle  Street,  in  the  heart  of  the  city 
of  London.  The  business  of  the  bank  had  previously 
been  carried  on  at  Grocers'  Hall,  in  the  Poultry. 
From  that  day  until  the  period  of  the  World  War 
(1914-1918)  ''the  Old  Lady  of  Threadneedle  Street" 
led  the  financial  institutions  of  the  world. 

In  1737  there  was  considerable  public  discussion 
about  the  propriety  of  again  renewing  the  bank 
charter.  In  the  course  of  the  public  debate,  the  fol- 
lowing opinion  of  the  bank  operations  was  expressed 
in  the  London  Magazine: 

''There  certainly  never  was  a  body  of  men  that 
contributed  more  to  the  pubHc  safety  than  the  Bank 
of  England.  This  flourishing  and  opulent  company 
have,  upon  every  emergency,  always  cheerfully  and 
readily  supplied  the  necessities  of  the  nation,  so  that 


418  BANKING,  CREDIT  AND  FINANCE 

there  never  have  been  any  difficulties — any  embar- 
rassment— any  delays  in  raising  the  money  which 
has  been  granted  by  parliament  for  the  service  of  the 
public;  and  it  may  very  truly  be  said  that  they  have, 
in  very  many  important  conjunctures,  relieved  the 
nation  out  of  the  greatest  difficulties,  if  not  absolute- 
ly saved  it  from  ruin." 

Events  in  the  Bank's  History. — In  1745,  there  was 
a  rmi  upon  the  bank,  occasioned  by  the  rebellion  in 
Scotland,  and  supposed  to  be  for  the  purpose  of  sup- 
plying the  adherents  of  the  Stuarts  with  gold.  A 
public  meeting  was  held  in  London  and  one  thousand 
one  hundred  and  forty  merchants  signed  a  declara- 
tion expressing  their  readiness  to  take  the  bank 
notes. 

The  3  per  cent  Consols  were  established  by  means 
of  the  bank  in  1752  and  have  ever  since  been  a 
famous  government  stock.  The  word  "consols"  is 
a  contraction  for  "consolidated."  Outstanding  gov- 
ernment annuities  w^ere  consolidated  in  the  3  per 
cents. 

In  1758  occurred  the  first  instance  of  a  forgery 
of  a  bank  note.  The  note  was  for  £20,  the  smallest 
amount  then  in  circulation.  The  forger  was  prompt- 
ly convicted  and  executed. 

In  1782,  the  total  capital  o(f  the  bank  was  in- 
creased to  £11,642,400,  or  approximately  $58,000,000. 
There  was  no  further  increase  of  capital  until  the 
year  1816,  since  which  time  it  has  been  largely  in- 
creased. 

In  1794,  the  bank  commenced  issuing  its  famous 
£5  notes. 


HISTORY  OF  BANKING  419 

During  various  periods  of  financial  depression,  the 
government  of  England  has  rendered  assistance  to 
the  bank  by  timely  administrative  action,  enabling 
it  to  maintain  its  high  reputation  and  meet  all  its 
obligations;  and  the  bank  on  its  side  has  made  many 
advances  to  the  government,  besides  managing  the 
public  debt  and  otherwise  aiding  in  the  operation  of 
the  government  finances.  It  enjoys  certain  exclu- 
sive privileges  of  banking  in  England,  and  fixes  the 
bank  rate  of  discount  at  regular  meetings  of 
**  courts '*  of  its  board  of  governors,  which  are  re- 
ferred to  elsewhere  in  connection  with  the  subject  of 
Foreign  Exchange. 

The  Bank  of  England  building  covers  a  whole 
block  bounded  on  the  south  by  Threadneedle  Street. 
Outside  it  presents  the  appearance  of  a  blind  outer 
wall  of  a  great  building  without  windows,  and  hav- 
ing here  and  there  ornamental  pillars  and  few  en- 
trances. The  plan  is  a  complex  system  of  offices, 
court  yards,  etc.,  the  result  of  growth  and  necessity. 

Among  the  curiosities  in  the  bank  library  is  a 
million  pound  bank  note.  Tradition  says  that  there 
have  been  only  four  such  notes  issued. 

Another  curiosity  in  the  bank  library  is  a  note  for 
£25,  which  had  slumbered  unobserved  for  111  years, 
and  was  then  presented  and  paid.  If  compound  in- 
terest had  been  payable  by  the  bank,  the  OAvner 
could  have  claimed  over  £60,000. 

About  50,000  notes  of  different  values  are  paid 
into   the   bank   every   day.     These   are  kept  five 


420  BANKING,  CREDIT  AND  FINANCE 

years  in  the  bank  cellars  and  are  then  destroyed  by 
burning.  New  notes  are  always  given  out  in  pay- 
ment of  bills  and  checks. 


Questions  for  Review,  Appendix 
"HISTORY  OF  BANKING" 

1.  What  is   the  earliest  evidence  that  ancient  money 
changers  allowed  interest  on  funds  lodged  in  their  hands? 

2.  What  form  of  banks  existed  in  ancient  Greece? 

3.  What  methods  were  employed  by  the  Athenian  bank- 
era? 

4.  Where  do  we  find  the  first  historic  suggestion  for 
the  establishment  of  a  joint-stock  bank? 

5.  What  were  the  bankers  and  banking  houses  of  an- 
cient Rome  called? 

6.  How  were  the  Roman  bankers  connected  with  the 
state? 

7.  What  is  the  popular  origin  of  the  word  **bank"? 

8.  What  other  derivation  of  the  word  bank  has  received 
support  ? 

9.  How  did  the  Florentine  bankers  of  Italy  achieve  their 
reputation  ? 

10.  Where  was  the  first  national  bank  founded  in  Europe, 
and  when? 

11.  What  were  the  characteristics  of  the  Bank  of  Venice  ? 

12.  When  were  the  first  bills  of  exchange  empbyed  in 
commerce  ? 

13.  When  was  the  Bank  of  Amsterdam  established  and 
to  what  cause  is  its  origin  ascribed? 

14.  What  is  the  meaning  of  the  term  "agio"? 


HISTORY  OF  BANKING  421 

15.  What  was  the  general  rate  of  the  "agio"  of  Amster- 
dam? 

16.  How  was  the  Bank  of  Amsterdam  managed? 

17.  When  was  the  Bank  of  North  America  established, 
and  on  what  plan? 

18.  State  briefly  the  history  of  the  first  Bank  of  the 
United  States. 

20.  What  was  the  object  of  the  Monetary  Commission 
appointed  by  the  United  States  Senate  in  1910,  and  its 
outcome  ? 

21.  When  was  gold  first  coined  in  England,  and  when  did 
it  enter  permanently  into  currency? 

22.  What  was  the  function  of  the  office  of  Royal  Ex- 
changer? 

23.  Why  was  this  office  re-established  by  Charles  I? 

24  When  did  the  business  of  money-changing  fall  into 
the  hands  of  the  goldsmiths  of  London? 

25.  Why  was  the  business  of  money-lending  conducted 
during  the  Middle  Ages  under  severe  restraints? 

26.  When  do  we  find  the  earliest  mention  in  English  his- 
tory of  a  market  rate  of  interest? 

27.  Who  were  the  principal  money-lenders  in  En^nd 
during  the  evolution  of  banking? 

28.  Who  were  the  Lombards,  and  what  was  their  con- 
nection with  English  banking? 

29.  When  was  the  taking  of  interest  for  money  made 
legal  in  England,  and  at  what  rate? 

30.  When  did  the  borrowing  of  money  by  bankers  for 
loaning  purposes  originate? 

31.  What  was  the  nature  of  the  "goldsmith's  notes/'  the 
first  kind  of  notes  issued  in  England? 

32.  How  long  did  the  business  of  banking  remain  en- 
tirely in  the  hands  of  the  so-called  "new-fashioned"  bankers? 

33.  How  was  the  transmission  of  money  effected  during 
the  Middle  Ages? 

34.  When  was  the  Bank  of  England  established? 


422  BANKING,  CREDIT  AND  FINANCE 

36.    What  objections  were  raised  to  its  establishment? 

36.  How  is  the  Bank  of  England  governed? 

37.  How  is  the  English  bank  rate  of  discount  fixed? 

38.  What  is  the  relation  of  the  Bank  of  England  to  the 
British  government? 


PROVISIONS  OF  THE  EDGE  BILL 


Banking  Corporations  Authorized 
to  do  Foreign  Banking  Business. 

The  Edge  bill,  providing  for  the  Federal  incorpora- 
tion of  institutions  organized  for  the  purpose  of 
carrying  on  international  or  foreign  banking  and 
other  financial  operations,  was  approved  by  the 
President  December  24,  1919.  The  text  of  the  law 
is  given  below : 

Be  it  enacted  by  the  Senate  and  House  of  Repre- 
sentatives of  the  United  States  of  America  in  Con- 
gress assembled.  That  the  act  approved  December 
23,  1913,  known  as  the  Federal  Reserve  Act,  as 
amended,  be  further  amended  by  adding  a  new  sec- 
tion as  follows: 

*'Sec.  25  (a).  Corporations  to  be  organized  for  the 
purpose  of  engaging  in  international  or  foreign  bank- 
ing or  other  international  or  foreign  financial  oper- 
ations, or  in  banking  or  other  financial  operations 
in  a  dependency  or  insular  possession  of  the  United 
States,  either  directly  or  through  the  agency,  owner- 
ship, or  control  of  local  institutions  in  foreign  coun- 
tries, or  in  such  dependencies  or  insular  possessions 
as  provided  by  this  section,  and  to  act  when  required 
by  the  Secretary  of  the  Treasury  as  fiscal  agents  of 
the  United  States,  may  be  formed  by  any  number  of 
natural  persons,  not  less  in  any  case  than  five. 

423 


124  BANKING,  CREDIT  AND  FINANCE 

''Such  persons  shall  enter  into  articles  of  associa- 
tion which  shall  specify  in  general  terms  the  objects 
for  which  the  association  is  formed  and  may  contain 
any  other  provisions  not  inconsistent  with  law  which 
the  association  may  see  fit  to  adopt  for  the  regula- 
tion of  its  business  and  the  conduct  of  its  affairs. 

"Such  articles  of  association  shall  be  signed  by 
all  of  the  persons  intending  to  participate  in  the 
organization  of  the  corporation,  and  thereafter  shall 
be  forwarded  to  the  Federal  Reserve  Board  and  shall 
be  filed  and  preserved  in  its  office.  The  persons 
signing  the  said  articles  of  association  shall,  under 
their  hands,  make  an  organization  certificate  which 
shall  specifically  state: 

"First.  The  name  assumed  by  such  corporation, 
which  shall  be  subject  to  the  approval  of  the  Federal 
Reserve  Board. 

*  *  Second.  The  place  or  places  where  its  operations 
are  to  be  carried  on. 

"Third.  The  place  in  the  United  States  where  its 
home  office  is  to  be  located. 

"Fourth.  The  amount  of  its  capital  stock  and  the 
number  of  shares  into  which  the  same  shall  be 
divided. 

"Fifth.  The  names  and  places  of  business  or 
residence  of  the  persons  executing  the  certificate  and 
the  number  of  shares  to  which  each  has  subscribed. 

"Sixth.  The  fact  that  the  certificate  is  made  to 
enable  the  persons  subscribing  the  same,  and  all 
other  persons,  firms,  companies,  and  coii)orations, 
who  or  which  may  thereafter  subscribe  to  or  pur- 
chase shares  of  the  capital  stock  of  such  corporation, 


PROVISIONS  OF  THE  EDGE  BILL  426 

to  avail  themselves  of  the  advantages  of  this  section. 

"The  persons  signing  the  organization  certificate 
shall  duly  acknowledge  the  execution  thereof  before 
a  judge  of  some  coui-t  of  record  or  notary  public, 
who  shall  certify  thereto  under  the  seal  of  such  court 
or  notary,  and  thereafter  the  certificate  shall  be  for- 
warded to  the  Federal  Reserve  Board  to  be  filed  and 
preserved  in  its  office.  Upon  duly  making  and  filing 
articles  of  association  and  an  organization  certifi- 
cate, and  after  the  Federal  Reserve  Board  has  ap- 
proved the  same  and  issued  a  permit  to  begin  busi- 
ness, the  association  shall  become  and  be  a  body 
corporate,  and  as  such  and  in  the  name  designated 
therein  shall  have  power  to  adopt  and  use  a  corporate 
seal,  which  may  be  changed  at  the  pleasure  of  its 
board  of  directors;  to  have  succession  for  a  period 
of  twenty  years  unless  sooner  dissolved  by  the 
act  of  the  shareholders  owning  two-thirds  of  the 
stock  or  by  an  act  of  Congress  or  unless 
its  franchise  becomes  forfeited  by  some  viola- 
tion of  law;  to  make  contracts;  to  sue  and  be 
sued,  complain,  and  defend  in  any  court  of 
law  or  equity;  to  elect  or  appoint  directors,  all  of 
whom  shall  be  citizens  of  the  United  States;  and, 
by  its  board  of  directors,  to  appoint  such  officers 
and  employees  as  may  be  deemed  proper,  define 
their  authority  and  duties,  require  bonds  of  them, 
and  fix  the  penalty  thereof,  dismiss  such  officers  or 
employees,  or  any  thereof,  at  pleasure  and  appoint 
others  to  fill  their  places;  to  prescribe,  by  its  board 
of  directors,  by-laws  not  inconsistent  with  law  or 
with  the  regulations  of  the  Federal  Reserve  Board 
regulating  the  manner  in  which  its  stock  shall  be 


426  BANKING,  CREDIT  AND  FINANCE 

transferred,  its  directors  elected  or  appointed,  its 
(.fficers  and  ciHi)loyecs  appointed,  its  property  trans- 
ferred, and  the  privileges  granted  to  it  by  law  ex- 
ercised and  enjoyed. 

Powers  Conferred  on  Corporations  Organized. 

**Each  corporation  so  organized  shall  have  power, 
under  such  rules  and  regulations  as  the  Federal 
Reserve  Board  may  prescribe: 

*'(a)  To  purchase,  sell,  discount,  and  negotiate, 
with  or  without  its  indorsement  or  guaranty,  notes, 
drafts,  checks,  bills  of  exchange,  acceptances,  includ- 
ing bankers'  acceptances,  cable  transfers,  and  other 
evidences  of  indebtedness;  to  purchase  and  sell,  with 
or  without  its  indorsement  or  guaranty,  securities, 
including  the  obligations  of  the  United  States  or  of 
any  State  thereof  but  not  including  shares  of  stock 
in  any  corporation  except  as  herein  provided;  to 
accept  bills  or  drafts  drawn  upon  it  subject  to  such 
limitations  and  restrictions  as  the  Federal  Reserve 
Board  may  impose;  to  issue  letters  of  credit;  to  pur- 
chase and  sell  coin,  bullion,  and  promissory  notes 
under  such  general  conditions  as  to  security  and 
•such  limitations  as  the  Federal  Reserve  Board  may 
prescribe,  but  in  no  event  having  liabilities  outstand- 
ing thereon  at  any  one  time  exceeding  ten  times  its 
capital  stock  and  surplus;  to  receive  deposits  outside 
of  the  United  States  and  to  receive  only  such  deposits 
within  the  United  States  as  may  be  incidental  to  or 
for  the  purpose  of  carrying  out  transactions  in  forn 
eign  countries  or  dependencies  or  insular  possessions 
of  the  United  States;  and  generally  to  exercise  such 
powers  as  are  incidental  to  the  powers  conferred  by 
this  act  or  as  may  be  usual,  in  the  detemiination  of 


PROVISIONS  OF  THE  EDGE  BILL  427 

the  Federal  Reserve  Board,  in  connection  with  the 
transaction  of  the  business  of  banking  or  other  finan- 
cial operations  in  the  countries,  colonies,  de- 
pendencies, or  possessions  in  which  it  shall  transact 
business  and  not  inconsistent  with  the  powers  specifi- 
cally granted  herein.  Nothing  contained  in  this  sec- 
tion shall  be  construed  to  prohibit  the  Federal  Re- 
serve Board,  under  its  power  to  prescribe  rules  and 
regulations,  from  limiting  the  aggregate  amount  of 
liabilities  of  any  or  all  classes  incurred  by  the  cor- 
poration and  outstanding  at  any  one  time.  When- 
ever a  corporation  organized  under  this  section  re- 
ceives deposits  in  the  United  States  authorized  by 
this  section  it  shall  carry  reserves  in  such  amounts 
as  the  Federal  Reserve  Board  may  prescribe,  but 
in  no  event  less  than  10  per  centum  of  its  deposits. 

**(b)  To  establish  and  maintain  for  the  transac- 
tion of  its  business  branches  or  agencies  in  foreign 
countries,  their  dependencies  or  colonies,  and  in  the 
dependencies  or  insular  possessions  of  the  United 
States,  at  such  places  as  may  be  approved  by  the 
Federal  Reserve  Board  and  under  such  rules  and 
regulations  as  it  may  prescribe,  including  countries 
or  dependencies  not  specified  in  the  original  organiza- 
tion certificate. 

**(c)  With  the  consent  of  the  Federal  Reserve 
Board  to  purchase  and  hold  stock  or  other  certificates 
of  ownership  in  any  other  corporation  orgamzed 
under  the  provisions  of  this  section  or  under  the  laws 
of  any  State,  dependency,  or  insular  possession  ot 
the  United  States  but  not  engaged  in  the  general 
business  of  buying  or  selling  goods,  wares,  merchan- 
dise, or  commodities  in  the  United  States,  and  not 


4M  BANKING,  CREDIT  AND  FINANCE 

transacting  any  business  in  the  United  States  ex- 
cept such  as  in  the  judgment  of  the  Federal  Reserve 
Board  may  be  incidental  to  its  international  or  for- 
eign business:  Provided,  however,  That,  except  with 
the  approval  of  the  Federal  Reserve  Board,  no  cor- 
poration organized  hereunder  shall  invest  in  any  one 
corporation  an  amount  in  excess  of  10  per  centum  of 
its  own  capital  and  surplus,  except  in  a  corporation 
engaged  in  the  business  of  banking,  when  15  per 
centum  of  its  cajiital  and  surplus  may  be  so  invested: 
Provided  further,  That  no  corporation  organized 
hereunder  shall  purchase,  own,  or  hold  stock  or 
certificates  of  ownership  in  any  other  corporation 
organized  hereunder  or  under  the  laws  of  any  State 
which  is  in  substantial  competition  therewith,  or 
which  holds  stock  or  certificates  of  ownership  in  cor- 
porations w^hich  are  in  substantial  competition  with 
the  purchasing  corporation. 

* 'Nothing  contained  herein  shall  prevent  corpora- 
tions organized  hereunder  from  purchasing  and  hold- 
ing stock  in  any  corporation  where  such  purchase 
shall  be  necessary  to  prevent  a  loss  upon  a  debt 
previously  contracted  in  good  faith;  and  stock  so 
purchased  or  acquired  in  corporations  organized 
under  this  section  shall  wdthin  six  months  from  such 
purchase  be  sold  or  disposed  of  at  public  or  private 
sale  unless  the  time  to  so  dispose  of  same  is  extended 
by  the  Federal  Reserve  Board. 

**No  corporation  organized  imder  this  section  shall 
carry  on  any  part  of  its  business  in  the  United  States 
except  such  as,  in  the  judgment  of  the  Federal  Re- 
serve Board,  shall  be  incidental  to  its  international 
OT  foreign  business;  And  provided  further,  That 


PROVISIONS  OF  THE  EDGE  BILL  ttO 

except  such  as  is  incidental  and  preliminaiy  to  its 
organization  no  such  corporation  shall  exercise  any 
of  the  powers  conferred  by  this  section  until  it  has 
been  duly  authorized  by  the  Federal  Reserve  Board 
to  commence  business  as  a  corporation  organized 
under  the  provisions  of  this  section. 

**No  corporation  organized  under  this  section  shall 
engage  in  commerce  or  trade  in  commodities  except 
as  specifically  provided  in  this  section,  nor  shall  it 
either  directly  or  indirectly  control  or  fix  or  attempt 
to  control  or  fix  the  price  of  any  such  commodities. 
The  charter  of  any  corporation  violating  this  pro- 
vision shall  be  subject  to  forfeiture  in  the  manner 
hereinafter  provided  in  this  section.  It  shall  be  un- 
lawful for  any  director,  officer,  agent,  or  employee  of 
any  such  corporation  to  use  or  to  conspire  to  use  the 
credit,  the  funds,  or  the  power  of  the  corporation  to 
fix  or  control  the  price  of  any  such  commodities,  and 
any  such  person  violating  this  provision  shall  be  liable 
to  a  fine  of  not  less  than  $1,000  and  not  exceeding 
$5,000  or  imprisonment  not  less  than  one  year  and 
not  exceeding  five  years,  or  both,  in  the  discretion 
of  the  court. 

Minimum  Amount  of  Capital  Stock  Provided. 

"No  corporation  shall  be  organized  under  the  pro- 
visions of  this  section  with  a  capital  stock  of  less 
than  $2,000,000,  one-quarter  of  which  must  be  paid  in 
before  the  corporation  may  be  authorized  to  begm 
business,  and  the  remainder  of  the  capital  stock  of 
such  corporation  shall  be  paid  in  instalhnents  of  at 
least  10  per  centum  on  the  whole  amount  to  which 
the  corporation  shall  be  limited  as  frequently  as  one 
installment  at  the  end  of  each  succeeding  two  months 


430  BANKING,  CREDIT  AND  FINANCE 

from  the  time  of  the  commencement  of  its  business 
operations  until  the  whole  of  the  capital  stock  shall 
be  paid  in.  The  capital  stock  of  any  such  corj^ora- 
tion  may  be  increased  at  any  time,  with  the  approval 
of  the  Federal  Reserve  Board,  by  a  vote  of  two-thirds 
of  its  shareholders  or  by  unanimous  consent  in  writ- 
ing of  the  shareholders  without  a  meeting  and  with- 
out a  formal  vote,  but  any  such  increase  of  capital 
shall  be  fully  paid  in  within  ninety  days  after  such 
approval,  and  may  be  reduced  in  like  manner,  pro- 
vided that  in  no  event  shall  it  be  loss  than  $2,000,000. 
No  corporation,  except  as  herein  provided,  shall 
during  the  time  it  shall  continue  its  operations  with- 
draw or  permit  to  be  w  ithdrawn,  either  in  the  form 
of  dividends  or  otherwise,  an}^  portion  of  its  capital. 
Any  national  banking  association  may  invest  in  the 
stock  of  any  corporation  organized  under  the  pro- 
visions of  this  section,  but  the  aggregate  amount  of 
stock  held  in  all  corporations  engaged  in  business 
of  the  kind  described  in  this  section  and  in  section 
25  of  the  Federal  reserve  act  as  amended  shall  not 
exceed  10  per  centimi  of  the  subscribing  bank's 
capital  and  surplus. 

*^A  majority  of  the  shares  of  the  capital  stock  of 
any  such  corporation  shall  at  all  times  be  held  and 
owned  by  citizens  of  the  United  States,  by  corpora- 
tions the  controlling  interest  in  which  is  owned  by 
citizens  of  the  United  States,  chartered  under  the 
laws  of  the  United  States  or  of  a  State  of  the  United 
States,  or  by  firms  or  companies,  the  controlling  in- 
terest in  which  is  owned  by  citizens  of  the  United 
States.  The  provisions  of  section  8  of  the  act  ap- 
proved October  15,  1914,  entitled  'An  act  to  supple- 


PROVISIONS  OF  THE  EDGE  BILL  431 

ment  existing  laws  against  unlawful  restraints  and 
monopolies,  and  for  other  purposes/  as  amended  by 
the  acts  of  May  15,  1916,  and  September  7,  1916, 
shall  be  construed  to  apply  to  the  directors,  other 
officers,  agents,  or  employees  of  corporations  organ- 
ized under  the  provisions  of  this  section:  Provided, 
however.  That  nothing  herein  contained  shall  (1) 
prohibit  any  director  or  other  officer,  agent,  or  em- 
ployee of  any  member  bank,  who  has  procured  the 
approval  of  the  Federal  Reserve  Board  from  serving 
at  the  same  time  as  a  director  or  other  officer,  agent, 
or  employee  of  any  corporation  organized  under  the 
provisions  of  this  section  in  whose  capital  stock  such 
member  bank  shall  have  invested;  or  (2)  prohibit 
any  director  or  other  officer,  agent,  or  employee  of 
any  corporation  organized  under  the  provisions  of 
this  section,  who  has  procured  the  approval  of  the 
Federal  Reserve  Board,  from  serving  at  the  same 
time  as  a  director  or  other  officer,  agent,  or  employee 
of  any  other  corporation  in  whose  capital  stock  such 
first-mentioned    corporation    shall    have    invested 
under  the  provisions  of  this  section. 

**No  member  of  the  Federal  Reserve  Board  shall 
be  an  officer  or  director  of  any  corporation  organized 
under  the  provisions  of  this  section,  or  on  any  cor- 
poration engaged  in  similar  business  organized  under 
the  laws  of  any  State,  nor  hold  stock  in  any  such 
corporation,  and  before  entering  upon  his  duties  as 
a  member  of  the  Federal  Reserve  Board  he  shall 
certifv  under  oath  to  the  Secretary  of  the  Treasury 
that  he  has  complied  with  this  requirement. 

-Shareholders  in  any  corporation  organized  under 
the  provisions  of  this  section  shall  be  hable  for  the 


432  BANKING  CREDIT  AND  FINANCE 

amount  of  their  unpaid  stock  subscriptions.  No 
such  corporation  shall  become  a  member  of  any  Fed- 
eral reserve  bank. 

Privileges  Forfeited  for  Failure  to  Comply 
with  Provisions — Liquidation. 

*' Should  any  corporation  organized  hereunder  vio- 
late or  fail  to  comply  with  any  of  the  provisions  of 
this  section,  all  of  its  rights,  privileges,  and  fran- 
chises derived  herefrom  may  thereby  be  forfeited. 
Before  any  such  corporation  shall  be  declared  dis- 
solved, or  its  rights,  privileges,  and  franchises  for- 
feited, any  noncompliance  with,  or  violation  of  such 
laws  shall,  however,  be  determined  and  adjudged  by 
the  United  States  of  competent  jurisdiction,  in  a 
suit  brought  for  that  purpose  in  the  district  or  ter- 
ritory in  which  the  home  office  of  such  corporation  is 
located,  which  suit  shall  be  brought  by  the  United 
States  at  the  instance  of  the  Federal  Reserve  Board 
or  tlie  Attorney  General.  Upon  adjudication  of  such 
noncompliance  or  violation,  each  director  and  officer 
who  participated  in,  or  assented  to,  the  illegal  act 
or  acts,  shall  be  liable  in  his  personal  or  individual 
capacity  for  all  damages  w^hich  the  said  corporation 
shall  have  sustained  in  consequence  thereof.  No 
dissolution  shall  take  aw^ay  or  impair  any  remedy 
against  the  corporation,  its  stockholders,  or  officers 
for  any  liability  or  penalty  previously  incurred. 

^*  Any  such  corporation  may  go  into  voluntary 
liquidation  and  be  closed  by  a  vote  of  its  shareholders 
owning  two-thirds  of  its  stock. 

** Whenever  the  Federal  Reserve  Board  shall  bo- 
come  satisfied  of  the  insolvency  of  any  such  corpora- 


PROVISIONS  OP  THE  EDGE  BILL  433 

tion,  it  may  appoint  a  receiver  who  shall  take  posses- 
sion of  all  of  the  property  and  assets  of  the  corpora- 
tion and  exercise  the  same  rights,  privileges,  powers, 
and  authority  with  respect  thereto  as  are  now  ex- 
ercised by  receivers  of  national  banks  appointed  by 
the  Comptroller  of  the  Currency  of  the  United  States: 
Provided,  however,  That  the  assets  of  the  corpora- 
tion subject  to  the  laws  of  other  countries  or  juris- 
dictions shall  be  dealt  with  in  accordance  with  the 
terms  of  such  law^s. 

*' Every  corporation  organized  imder  the  provisions 
of  this  section  shall  hold  a  meeting  of  its  stockholders 
annually  upon  a  date  fixed  in  its  by-laws,  such  meet- 
ing to  be  held  at  its  home  office  in  the  United  States. 
Every  such  corporation  shall  keep  at  its  home  office 
books  containing  the  names  of  all  stoclvholders  there- 
of, and  the  names  and  addresses  of  the  members  of 
its  board  of  directors,  together  with  copies  of  all  re- 
ports made  by  it  to  the  Federal  Reserv^e  Board. 
Every  such  corporation  shall  make  reports  to  the 
Federal  Reserve  Board  at  such  times  and  in  such 
form  as  it  may  require;  and  shall  be  subject  to  ex- 
amination once  a  year  and  at  such  other  times  as 
may  be  deemed  necessary  by  the  Federal  Reserve 
Board  by  examiners  appointed  by  the  Federal  Re- 
serve Board,  the  cost  of  such  examinations,  including 
the  compensation  of  the  examiners,  to  be  fixed  by 
the  Federal  Reserve  Board  and  to  be  paid  by  the 
corporation  examined. 

**The  directors  of  any  corporation  organized  undei- 
the  provisions  of  this  section  may,  semianuuaUy,  de- 
clare a  dividend  of  so  much  of  the  net  profits  of  the 
corporation  as  they  shall  judge  expedient;  but  ea^ 


434  BANKING,  CREDIT  AND  FINANCE 

corporation  shall,  before  the  declaration  of  a  divi- 
dend, caiTy  one-tenth  of  its  net  profits  of  the  pre- 
ceding half  year  to  its  surplus  fund  until  the  same 
shall  amount  to  20  per  centum  of  its  capital  stock. 

**Any  coiT)oration  organized  under  the  provisions 
of  this  section  shall  be  subject  to  tax  by  the  State 
witJiin  which  its  home  office  is  located  in  the  same 
manner  and  to  the  same  extent  as  other  corporations 
organized  under  the  laws  of  that  State  which  arc 
transacting  a  similar  character  of  business.  The 
shares  of  stock  in  such  corporation  shall  also  be  sub- 
ject to  tax  as  the  personal  property  of  the  o\vners  or 
holders  thereof  in  the  same  manner  and  to  the  same 
extent  as  the  shares  of  stock  in  similar  State  corpora- 
tions. 

"Any  corporation  organized  imder  the  provisions 
of  this  section  may  at  any  time  within  the  two  years 
next  previous  to  the  date  of  the  expiration  of  its 
corporate  existence,  by  a  vote  of  the  shareholders 
owning  two-thirds  of  its  stock,  apply  to  the  Fed- 
eral Reserve  Board  for  its  approval  to  extend  the 
period  of  its  corporate  existence  for  a  term  of  not 
more  than  twenty  years,  and  upon  certified  approval 
of  the  Federal  Reserve  Board  such  corporation  shall 
have  its  corporate  existence  for  such  extended  period 
unless  sooner  dissolved  by  the  act  of  the  shareholders 
owning  two-thirds  of  its  stock,  or  by  an  act  of  Con- 
gress, or  unless  its  franchise  becomes  forfeited  by 
some  violation  of  law. 

Banking  Institutions  May  Be  Converted. 

**Any  bank  or  banking  institution,  principally 
engaged  in  foreign  business,  incorporated  by  special 


PROVISIONS  OF  THE  EDGE  BILL  435 

law  of  any  State  or  of  the  United  States  or  organ- 
ized under  the  general  laws  of  any  State  or  of  the 
United  States  and  having  an  -animpaired  capital 
sufficient  to  entitle  it  to  become  a  corporation  under 
the  provisions  of  this  section  may,  by  the  vote  of 
the  shareholders  owning  not  less  than  two-thirds 
of  the  capital  stock  of  such  beink  or  banking  asso- 
ciation, ^vith  the  approval  of  the  Federal  Reserve 
Board,  be  converted  into  a  Federal  corporation  of 
the  kind  authorized  by  this  section  with  any  name 
approved  by  the  Federal  Reserve  Board:  Provided, 
however,  That  said  conversion  shall  not  be  in  con- 
travention of  the  State  law.  In  such  case  the  articles 
of  association  and  organization  certificate  may  be 
executed  by  a  majority  of  the  directors  of  the  bank 
or  banking  institution,  and  the  certificate  shall  de- 
clare that  the  owners  of  at  least  two-thirds  of  the 
capital  stock  have  authorized  the  directors  to  make 
such  certificate  and  to  change  or  convert  the  bank 
or  banking  institution  into  a  Federal  corporation. 
A  majority  of  the  directors,  after  executing  the  ar- 
ticles of  association  and  the  organization  certificate, 
shall  have  power  to  execute  all  other  papers  and  to 
do  whatever  may  be  required  to  make  its  organiza- 
tion perfect  and  complete  as  a  Federal  corporation. 
The  shares  of  any  such  corporation  may  continue  to 
be  for  the  same  amount  each  as  they  were  before  the 
conversion,  and  the  directors  may  continue  to  be 
directors  of  the  corporation  until  others  are  elected 
or  appointed  in  accordance  with  the  provisions  of 
this  section.  When  the  Federal  Reserve  Board  has 
given  to  such  corporation  a  certificate  that  the  pro- 
visions of  this  section  have  been  complied  with,  such 
corporation  and  all  its  stockholders,  officers,  and 


4M  BANKING,  CREDIT  AND  FINANCE 

employees  shall  have  the  same  powers  and  privi- 
leges, and  shall  be  subject  to  the  same  duties,  liabil- 
ities, and  regulations,  in  all  respects,  as  shall  have 
been  prescribed  by  this  section  for  corporations 
originally  organized  hereunder. 

*'Every  officer,  director,  clerk,  employee,  or  agent 
of  any  corporation  organized  under  this  section  who 
embezzles,  abstracts,  or  willfully  misapplies  any  of 
the  moneys,  funds,  credits,  securities,  evidences  of 
indebtedness  or  assets  of  any  character  of  such  cor- 
poration; or  who,  without  authority  from  the  di- 
rectors, issues  or  puts  forth  any  certificate  of  deposit, 
draws  any  order  or  bill  of  exchange,  makes  any 
acceptance,  assigns  any  note,  bond,  debenture,  draft, 
bill  of  exchange,  mortgage,  judgment,  or  decree;  or 
who  makes  any  false  entry  in  any  book,  report,  or 
statement  of  such  corporation  with  intent,  in  either 
case,  to  injure  or  defraud  such  corporation  or  any 
other  company,  body  politic  or  corporate,  or  any 
individual  person,  or  to  deceive  any  officer  of  such 
corporation,  the  Federal  Reserve  Board,  or  any  agent 
or  examiner  appointed  to  examine  the  affairs  of  any 
such  corporation;  and  every  receiver  of  any  such 
corporation  and  every  clerk  or  employee  of  such  re- 
ceiver who  shall  embezzle,  abstract,  or  willfully  mis- 
apply or  wrongfully  convert  to  his  own  use  any 
moneys,  funds,  credits,  or  assets  of  any  character 
which  may  come  into  his  possession  or  under  his 
control  in  the  execution  of  his  trust  or  the  perform- 
ance of  the  duties  of  his  employment;  and  every  such 
receiver  or  clerk  or  employee  of  such  receiver  who 
shall,  with  intent  to  injure  or  defraud  any  person, 
body  politic  or  coi-porate,  or  to  deceive  or  mis- 


PROVISIONS  OF  THE  EDGE  BILL  4Wt 

lead  the  Federal  Reserve  Board,  or  any  agent 
or  examiner  appointed  to  examine  the  affairs 
of  such  receiver,  shall  make  any  false  entry 
in  any  book,  report,  or  record  of  any  matter  connect- 
ed with  the  duties  of  such  receiver;  and  every  person 
who  with  like  intent  aids  or  abets  any  officer,  di- 
rector, clerk,  employee,  or  agent  of  any  corporation 
organized  under  this  section,  or  receiver  or  clerk 
or  employee  of  such  receiver  as  aforesaid  in  any 
violation  of  this  section,  shall  upon  conviction  there- 
of be  imprisoned  for  not  less  than  two  years  nor  more 
than  ten  years,  and  may  also  be  fined  not  more  than 
$5,000,  in  the  discretion  of  the  court. 

**  Whoever  being  connected  in  any  capacity  with 
any  corporation  organized  under  this  section  rep- 
resents in  any  way  that  the  United  States  is  liable 
for  the  payment  of  any  bond  or  other  obligation,  or 
the  interest  thereon,  issued  or  incurred  by  any  cor- 
poration organized  hereunder,  or  that  the  United 
States  incurs  any  liability  in  respect  of  any  act  or 
omission  of  the  corporation,  shall  be  punished  by  a 
fine  of  not  more  than  $10,000  and  by  imprisonment 
for  not  more  than  five  years.'' 

State  and  National  Banks,  1920. 

On  February  28, 1920,  there  were  21,961  State 
banking  institutions  with  a  total  capital  of  $1,402,- 
365,014.88;  with  deposits  of  $24,189,608,399.21;  and 
total  resources  of  $29,024,095,838.83. 

At  the  same  date  the  Comptroller  of  the  Currency 
in  his  report  lists  7,933  National  banks  with  total 
deposits  of  $16,965,122,000;  and  total  resources  of 


438  BANKING,  CREDIT  AND  FINANCE 

$21,862,540,000.  The  number  of  State  banks  in  the 
country  exceeded  the  number  of  National  banks  by 
14,028.  The  deposits  in  the  State  banks  exceeded 
the  deposits  of  the  National  banks  by  $7,224,486,- 
399.21. 


INDEX 


Accommodation  paper,  96 

Accountant,  value  of  the,   143 

Accounts,  when  due,  102 

Accrual  of  interest,  56 

Act  of  1873,  provisions  of,  229 

Accurate  interest  62 

Advances     to     member     banks. 

Federal  Reserve,  187 
Advantages  of  metal,  20 
Advantages  of  taking  a  note,  104 
Advisory  Council,  Federal,  184 
Agencies,  mercantile,   67 
Agents,  Federal  land  banks,  207 
Agents,  federal  reserve,  168 
Agio,  meaning  of,  385 
Allowance  of  interest,  39 
Amendments  to  Federal  Reserve 

Act,  170 
Amortization,  benefits  of,  214 
Amortization,  what  is?  209 
Amortization,  what  it  does  for 

the  farmer,  213 
Amsterdam,  bank  of,  384 
Analysis  of  statements,   141 
Ancient    banking   transactions, 

33 
Appendix — History     of     Bank- 
ing, 370 
Appraisal   of  farm   lands,   206 
Arbitrated  exchange,  265 
Assets  and   sales,   148 
Assets,  examination  of,  144 
Assets,  liquidation  of  bank,  226 
Assets,  quick,  proportion  of  147 
Associations,  farm  loan,  202 
Athenian  bankers,  methods  of, 

373 
Attorney,  power  of,  107 
Authorities  consulted,  16 
Babylonian  tablets,  33 

Balance     sheet     for     manufac- 
turers, 146 
for  commission  men,  146 
for  jobbers,   147 


for  retailers,  147 
"Bank,"  the  name,  52 

BANK,  origin  of  the  word,  378 
assets,  liquida.tion  of,  226 
capital,   how   employed,   31 
charters,  33 
checks,  79 

circulation,  profits  on,  254 
clerks,  etc.,  bonds  for,  66 
clerks,  suggestions  to,  74 
credit  department,  57,  140 
credits,  136 
debits  and  credits,  61 
deposits  largely  credits,  320 
disposable  means  of,  31 
drafts,  90 

examinations,  60,  192 
examiner's  reports,  221 
expenses  of,  32 
first  joint  stock,  376 
first  run  on  a,  410 
loans,   53 
note  issues,  222 
notes,  securities  for,  254 
officers  of  a,  52 
reserves,  191 
statements,  61 

Bank  of  Amsterdam,  384 
Bank  of  Barcelona,  382 
Bank  of  England,  412 
Bank  of  England  notes,  130 
Bank  of  England  rate,  289 
Bank  of  Genoa,  383 
Bank  of  North  America,  35,  S88 
Bank  of  the  United  States,  34, 

391 
Bank  of  Venice,  381 
Banker,  the,  as  a  reference,  43 
Banker,   what   is    a?      29 
Bankers,    comme>rce    gave   rise 

to,  375 
Banker's  expedients,  72 
Bankers,  the  Florentine,  379 


439 


440 


INDEX 


BANKING,  a  new  epoch  in,  1G4 
business  of,  31 
foreign  exchange  a  branch  of, 

267 
history  of,  370,  422 
in  England,  early,  394 
methods  of,  49 
saves  time,  42 
power  of   United    States,   197 

Bank's  cash,  the,  63 

BANKS  and  their  uses,  29 
and  manufacturers,  152 
a  moral  influence,  46 
as  conimercial  institutions,  32 
borrowing  from,  55 
classification   of,  33 
collections  through,  102 
discourage  dishonesty,  47 
Federal  Land,  200 
Federal  Reserve,  163 
Federal  Reserve  branch,  174 
foreign  branches,  193 
foreign  departments  of,  258 
functions  of,  29 
help  business,  46 
insolvent,   224 
national,   50 
of  ancient  Greece,  372 
of  ancient  Rome,  377 
of  discount  and  deposit,  35 
organization  of,  49 
public  and   private,   30 
safe-keeping  of  money,  38 
savings,   36,   67 
state,  51 

supervision  of,  217 
utility  of,  37 

Barcelona,  Bank  of,  382 
Bars  of  gold,  commercial,  263 
Barter  and  exchange,  18 
Benefits  of  amortization,  214 
Bills,    commercial,    buying,    286 
Bills  of  exchange,  clean,  292 
Bills   of  exchange,   commercial, 

280 
Bills  of  exchange,  first,  384 
Bills  of  exchange,  miscellaneous 

charges  on,  293 
Bills  of  lading,  drafts  and,  105 
Bills,  safe  and  vmsafe,  290 
Bimetallic  standard,  232 
Board,  Farm  Loan,  201 


Bona-fide  holder,  who  is  a?  106 

Bond  deposits  with  U.  S.  Treas- 
urer, 254 

Bond-secured   circulation,  222 

Bonds  and  stocks,  338 

Bonds,  corporation,  333 

Bonds  for  faithful   service,  66 

Bonds,  government,  state,  mu- 
nicipal, 326-328 

Borrowers,  facts  reqmred  from, 
136 

Borrowers,  statements  from, 
139 

Borrowers,  net  worth  of,  148 

Borrowing    from    banks,    55 

Branch  banks,  Federal  Reserve, 
174 

Branch  banks,  foreign,  193 

British  consols,  131 

British  system   of  money,  264 

Broker's  paper,  60 

Brokers,  note,  108 

Brokers,  stock,  352 

Bucket  shops,  352 

Building  and  loan  associations, 
332 

Bullion,  silver,  purchase  of,  231 

Bullion,  standard,  239 

Business  helped  by  banks,  46 

Business   of  banking,   81 

Call  money,  62 

Canadian  money,  132 

Canceling   checks,   87 

CAPITAL,    a   dealer   in,   30 
and  its  control,  299 
getting  along  without,  301 
insurance  premiums  as,  302 
loans  to   government  as,   301 
savings-bank  deposits  as,  302 
the  "slavery"  to,  310 
who  controls  it?  304 
who  owns  it?  303 

Capitalism,  the  weakness  of,  312 
Capitalist,  are  you  a  ?  299 
Cash,  the  bank's,  63 
Cashing  your  own  check,  86 
Certificate  of  deposit,  88 
Certificates,  gold,  249 
Certificates,  hypothecation,  287 
Certificates,  silver,  250 
Certificates  of  insurance,  288 
Certificates,  clearing-house,  71 


INDEX 


441 


Certified  checks,  88 
Changes  in  exchange  rates,  118 
Charter  of  Bank  of  England,  415 
Charters,  bank,   33 
Check,  cashing  your  own,  86 
Check  collections,  156 
Check  indorsements,  83 
Check-holders,  identification  of, 
82 

CHECKS,  bank,  79 
canceling,  87 
certified,  88 
crossed,  130 
figures  and  words,  81 
forged,  91 

for  special  purposes,  86 
"kiting,"   90 
no  funds,  86 
not  sufficient  funds,  86 
presented  after  death,  87 
safety  devices  for,  80 
should  be  numbered,  87 
wanderings  of,  157 

Circulation,  bond-secured.  222 
Circulation,  money  in,  64 
Circulation  of  Federal  Reserve 

notes,  189 
Classification  of  banks,  33 
Classification  of  paper,  59 
Clean  bills  of  exchange,  292 
Clearing  house,  the,  155 
Clearing-house  certificates,  71 
Clearing-house  clerks,  159 
Clearing-house  rules,  158 
Clearing-houses,  foreign,  161 
Clearings,  before  and  after,  277 
Clearings  in  New  York,  155 
Coin,  gold,  in  U.  S.,  235 

COINAGE,  free  and  unlimited, 
243 

gold  and  silver,  228 
of  gold,  240 
of  gold,  total,  235 
of  silver  241 
origin  of,  22 
unlimited,  243 

Coins  and  paper  currency,  233 
Coins,  gold  and  silver,  234,  235 
Coins,  institution  of,  23 
Coins,  subsidiary  silver,  236 
Collateral  note,  demand,  110 


Collaterals,  63 
Collection  of  drafts,  42 
Collections  by  draft,  101 
Collections,  check,  156 
Collections  through  banks,  102 
Commerce  and  exchange,  281 
Commerce,  facilities  for,  49 
Commerce,  instrument  of,  26 
Commercial  bars  of  gold,  263 
Commercial  bills,  buying,   286 
Commercial   bills    of   exchange, 

280 
Commercial  crises,  69 
Commercial  drafts,  99 
Commercial   institutions,   banks 

as,  32 
Commercial  loans,  145 

Commercial  paper,  discount  of, 
186 

Companies,  trust,  36 

Comptroller's  office,  the,  217 

Comptroller's    office,   depart- 
ments, 219 

Comptroller    reports    direct    to 
Congress,  218 

Comptroller's  responsibility,  224 

Consols,  British,   131 

Control  of  banks,  government, 
163 

Corporate   power  of  Reserve 
banks,  175 

Corporation  bonds,  333 

Cost  of  shipping  gold,  124 

Counterfeit  notes,  65 

Credit  and  Exchange,  112 

CREDIT,   a   depositor's,   66 
department,  the,  57,  140 
importance  of,  112 
instrument  of,   113 
laws  governing,  138 
letters  of,  133 
potency  of,  322 
recent  expansion  of,  323 
rule,  the  50  per  cent,  151 
science,  importance  of,  152 
science,   principles   and   mlee 

of,  142 
statement  blank,  137 
statements  for,  58 
tests,  uniform,   149 
the  subject  of,  136 
use  of  instruments  of,  54 

Credits,  bank,  62,  136,  14S 


442 


INDEX 


Crossed  checks,  130 
Currencies,  the  world's,  125 
Currency,    Comptroller    of    the. 
217 

CURRENCY,   emergency,   71 
exchange  of,  41 
fractional,  252 
mutilated,  64 
national   bank,   252 
paper,    64 
redemption  of,  244 

Crude  metals,  use  of,  21 
Curb  market.  New  York,  349 

Date  of  a  note,  95 

Death,  checks  presented  after,  87 

Debits   and    credits,   bank,   61 

Defalcations,  68 

Demand  collateral  note,  110 

Denominations   of   U.   S.   coins, 

245 
Departments  of  Comptroller's 

office,  219 
Deposit  and  withdrawal,  78 
Deposit,  ban"ks  of,  35 
Deposit,  certificate  of,  88 
Deposit  funds,  loans  of,  36 
Depositor's  credit,  66 
Depositor's   monthly   statement, 

78 
Depositors,  suggestions  to,  93 
Deposits  and  depositors,  77 
Deposits,   arranging  the,  78 
Deposits,  guarantee  of,  170 
Development  of  financial  ex- 
change, 113 
Direct  exchange,  265 
Directors  of  reserve  banks,  176 
Discount,  banks  of,  35 
Discount  of  commercial   paper, 

186 
Discount,  paper  offered  for,  58 
Discount  rates,  effect  of,  267 
Discovmt,  various  rates  of,  288 
Discounting  drafts,   103 
Discounting   paper,    105 
Disposable  means  of  a  bank,  31 
Dividends  of  reserve  banks,  178 
Dividends,  stock,  355 
Division  of  labor,  effect  of,  19 
Documentary  bills,  292 
Dollars,  silver,  coinage  of,  230 
Domestic  exchange,  123 


Draft,  collections  by,  101 

Draft  notices,   102 

Draft,  three-party,  103 

Drafts  and  bills  of  lading,  105 

Drafts  and  notes,  95 

Drafts,   bank,   90 

Drafts,  collection  of,  42 

Drafts,  commercial,  99 

Drafts,  discounting,  103 

Drafts,   revenue   stamp   on,   293 

Due  bills,   108 

Early  mediums  of  exchange,  19 

Early  view  of  money,  18 

Earnings,  Federal  Reserve  bank, 

194 
Earnings  of  land  banks,  215 
Edge  bill,  provisions  of,  423 
Effect  of  division  of  labor,  19 
•Embezzlements,   68 
Emergency  currency,  71 
Engineer,  value  of  the,  144 
England,  Bank  of,  412 
England,   early  banking  in,  393 
English  money,  129 
English  quotations  of  exchange 

rates,  273 
Example    of    farm   mortgage 

plan,   212 
Examination   of   assets,   benefit 

of,   144 
Examinations,  bank,  60,  192 
Examiner's  reports,  bank,  221 
Examiners,  national  bank,  220 

EXCHANGE,  a  typical  trans- 
action, 282 
commercial  bills  of,  280 
commercial  par  of,  270 
credit   and,   112 
domestic,  123 
early  mediums  of,  19 
effect  of  travel,  etc.,  119 
effect  on  foreign  trade,  117 
foreign,  257-298 
foreign,  what  it  is,  259 
man  lives  by,   18 
medium  of,  17 
of  commodities,  18 
of  currency,  41 
par  of,  115,  268 
principles  of,  11 
quotations  of  rates,  271 
rate  of,   266 
rates,  changes  in,  118 


INDEX 


44a 


rates,  foreign,  120 

sterling,  264 

terms,  123 

the  fall  in,  121 

the  test  of,  116 

to  find  the  par  of,  269 

transactions,  294 

two  kinds  of,   265 

Expedients,  bankers',  72 
Expenditures  of  the  rich,   314 
Expenditures,  record  of,  44 
Expenses  of  a  bank,  32 
Facilities  for  commerce,  49 
Facts  required  from  borrowers, 

136 
Farmers,  an  easy  loan  plan,  210 
Farm    lands,   appraisal,   206 
Farm  lands,  loans  on,  192 
Farm  lands,  reappraisal,  206 
Farm  Loan  Act,  200 
Farm  Loan  associations,  202 
Farm  loan  associations,  powers 

of,  204 
Farm  Loan  Board,  201 
Farm  loan  bonds,  204 

FARM  LOANS,  amortization  of, 
209 

amount  of,  207 

how  made,  203 

payments  on,  213 

purposes  of,  206 

restrictions  on,  205 
Farm  mortgages,  204,  205,  333 
Federal  Advisory  Council,  184 
Federal  Farm  Loan  Act,  200 
Federal  Farm  Loan  Board,  201 
Federal  Land  Bank  agents,  207 
Federal  Land  Bank  districts,  201 
Federal  Land  Bank  system,  200 

FEDERAL  RESERVE  Act,  main 
features  of,  164,  166 

Act,  object  of,  169 

Act,  terms  of,  172 

agents,  168 

bank  earnings,  194 

Bank  of  Chicago,  net  earnings 
of,  196 

banks,  board  of  directors,  176 

banks,  capital  stock  of,  173 

banks,  condition,   198 

banks,  corporate  power,  175 


banks,  government  deposits 

in,  187 
banks,  organization  of,  172 
banks,  powers  of,   185 
banks,  reserves  to  be  main- 
tained, 189 
Board,  181 
branch   banks,   174 
districts,  164 
member  banks,  168 
note  issues,  188 
system,  value  of,   165 
system,  advances  to  member 
banks,  187 

Fifty  per  cent  credit  rule,  151 
Financial    exchange,   develop- 
ment of,  113 
Fineness  of  U.  S.  coins,  245 
First  joint  stock  bank,  376 
First  stamped  metals,  23 
Foreign  bill  of  exchange,  280 
Foreign  branch  banks,  193 
Foreign  clearing-houses,  161 
Foreign  coins  not  legal  tender, 
245 

FOREIGN    EXCHANGE,    257- 
298 
effects  of  war,  121 
English  quotations,  273 
French  quotations,  272 
German  quotations,  273 
newspaper  quotations,  273 
rates,  120 
what  it  is,  259 

Foreign   trade,   effect  of  ex- 
change on,  117 
Foreign  trade,  magnitude  of,  259 
Forged  checks,  91 
Forged  indorsements,  56 
Fractional  currency,  252 
Franchise  tax  of  reserve  banks, 

178 
French  quotations  of  exchange 

rates,  272 
Functions  of  banks,  29 
Functions  of  money,  17 
Functions  of  trust  companies,  36 
Genoa,  Bank  of,  383 
German  draft  requirements,  295 
German  quotations  of  exchange 
rates,  273 


444 


INDEX 


GOLD  certificates,  234,  249 

coinage,  228,  240 

coin  in  U.  S.,  235 

coins,   234 

commercial  bar«  of,  263 

cost  of  shipping,  124 

sales  of,  244 

shipments,  262 

standard,  233 

standard  maintained,  194 

the  world's  63 
Goldsmiths,  the  ancient,  29 
Goldsmiths,  the  banking,  406 
Government  control,  need  of,  163 
Government  bonds,  326 
Government  deposits  in  reserve 

banks,  187 
Greenbacks,  248 
Growth  of  state  banks,  .3^92 
Guarantee  companies,  67 
Guaranteed  stock,  356 
Guarantee  of  deposits,  170 
History  of  banking,  370 
Holder,  who  is  a  bona-fide?  106 
How  panics  are  prevented,  167 
Hypothecation    certificates,    287 
Identification    of    check-holders, 

82 
Importance  of  .credit,  112 
Importance  of  credit  science,  152 
Indorsements,  check,  83 
Indorsements,  forged,  56 
Indorser  of  a  note,  97 
Industrial  stocks,  339 
Innocent  holder  of  note,  97 
Insolvent  banks,  224 
Institution  of  coins,  23 
Instrument  of  commerce,  26 
Instruments  of  credit,  113 
Instruments    of    credit,    use   of, 

54 
Insurance,  certificates  of,  288 
Insurance  premiums  as  capital, 

302 
Interest,  accurate,  62 
Interest,  allowance  of,  39 
Interest,  early  rates  of,  399 
Interest  notes,  97 
Interest,  when  it  accrues,  56 
International  money,   the   only, 

261 
Introduction,  3 

Investment,  funds  available  for, 
324 


Investment,  meaning  of,  319 

Investment,  rule  for,  343 

Investment    securities,    increase 
of,  325 

Investment,  speculation  and,  329 

Investments,  319 

Investments,  desirability  of,  326 

Issuing    department.    Comp- 
troller's,   222 

Jewish  money  changers,  the,  371 

Joint  note,  99 

Joint  stock  bank,  the  first,  376 

Joint  stock  land  banks,  208,  216 

Judgment  note,   110 

Kiting  checks,  90 

Labor,  division  of,  19 

Land  bank  districts,  201 

Land  bank  system.  Federal,  200 

LAND  BANKS,  capital  of,  202 

joint  stock,  200,  208 

l(ians  by,  215 

regional,  200 
Laws  governing  credit,  138 
Legal  tender,  108,  233 
Letters  of  credit,  133 
Limited  liability  companies,  357 
Liquidation  of  bank  assets,  226 
Listing  of  stock,  348 
Loan  associations,  farm,  202 
Loaning  of  money,  40 

LOANS,  bank,  53 
by  land  banks,  215 
farm,  how  made,  202 
of  deposit  funds,  36 
on  farm  lands,  192 
rates  for,  55 
to  government  as  capital,  301 

Lombards  as  usurers,  402 
London  stock  exchange,  347 
Man  lives  by  exchange,  18 
Manufacturers  and  the  banks, 

151 
Margins,  stock,  350 
Mark  signature,  a,  106 
Maturity,  date  of,  99 
Measure   of  value,  17 
Meaning  of  16  to  1,  239 
Means  of  a  bank,  31 
Medium  of  exchange,  17 
Mediums  of  exchange,  early,  19 
Mercantile  agencies,  67 
Metal,  advantages  of,  20 


INDEX 


445 


Metal,  use  of  as  money,  20 
Metals,  first  stamped,  23 
Metals,  use  of  crude,  21 
Metals,  various,  used  as  money, 

21 
Methods   of   banking,   49 
Miscellaneous   stocks,   342 

MONEY,  a  dealer  in,  30 
borrowing,   405 
British  system  of,  264 
early  view   of,   18 
functions  of,  17 
in  circulation,  64 
loaning  of,  40,  398 
of  account,  264 
"on  call,"  62 
origin   and   use   of,   17 
panics,  70 
safe-keeping  of,  38 
the  only  international,  261 
transmission  of,  41 
universal  instrument  of  com- 
merce, 26 
use  of  metal  as,  20 
various  metals  used,  21 

Monetary  events  since  1786, 

359-369 
Monetary  system  of  the  United 

States,  228 
Monetary   systems,   knowledge 

of,  260 
Mont  de  Piete,  379 
Moral  influence  of  banks,  46 
Mortgages,  farm,  204,  333 
Mortgages,  real  estate,  330 
Municipal  bonds,  328 
Mutilated  currency,  64 
National   Bank   Act,  35 
National  bank  currency,  252 
National  bank  examiners,  220 

NATIONAL  BANKS,  33,  34 

corporate  life  of,  50 

creation   of,   219 

organization  of,  50 

the  earliest,  380 
Nationalization  of  state  banks, 

179 
Need  of  government  control,  163 
Net  worth  of  borrowers,  148 
New  York  clearings,   155 
No  funds,  86 
"No  protest,"  103 


Non-payment  of  note,  notice  of, 

106 
North  America,  Bank  of,  35,  388 
Note   brokers,    108 
Note  issues,  bank,  222 
Note   issues.  Federal  Reserve, 

188 

NOTE,  advantages  of  taking,  104 
date  of,  95 

date  of  maturity,  99 
demand  collateral,  110 
indorser  of,  97 
joint,   99 
judgment,   110 
notice  of  non-payment,  106 
payment  on  a,  99 
presentation  for  payment,  98 
protest  of,  98 
signature  to  a,  99 
waiver  of  demand  and  notice, 
110 

NOTES,  accommodation,  96 
and  drafts,  95 
and  other  contracts,  108 
circulation  of  reserve,  189 
counterfeit,   65 
Treasury,  251 

Notice  of  non-payment  of  note. 

Notices,  draft,  102 
106 

Not  sufficient  funds,  86 

■Numbering  checks,  87 

Officers  of  a  bank,  52 

Officers  of  reserve  banks,  168 

Opportunities   in   foreign   ex- 
change,  258 

Organization  of  banks,   49 

Organization  of  reserve  bankc, 
172 

Origin  and  use  of  money,  17 

Origin  of  coinage,  22 

Origin   of   the  word  bank,   3.  ' 

Overdue  paper,  105 

Panic  of  1893,  the  225 

Panics  and  crises,  70 

Panics,  how  prevented,   167 

PAPER,  accommodation,  96 
classification  of,  59 
currency,  64 
discounting,  105 
money  of  the  U.  S.,  247 


440 


INDEX 


offered  for  discount,  58 
overdue,   105 
single-name,  109 

Par  of  exchanRe,  115,  268 
Par   of   exchange,   commercial, 

270 
Par   of   exchange,    to   find,    269 
Passbooks,    writing    up,    69 
Payment  on  a  note,  99 
Payment,    precautions    againsd 

wrong,  296 
Payments  on  fann  loans,  213 
P'enalty  for  usury,  60 
Pennies,  the   first,  25 
Personal  signatures,  91 
Postal   savings   bank,   68 
Pounds,  shillings,  and  pence,  24 
Power  of  attorney,   107 
Powers  of  farm   loan   associ- 
ations, 204 
Powers   of   Federal   Reserve 

Board,   182 
Powers  of  Reserve  Banks,  185 
Practical  features  of  bank  cre<f- 

its,   145 
Presentation  of  note,  98 
Principles  of  credit  science,  142 
Principles  of  exchange,  114 
Private   banks,   30 
Private  savings,  end  of,  305 
Profits,  effect  of  extraordinary, 

312 
Profits  on  bank  circulation,  254 
Promissory  notes,  95 
Protest,  98 
Protest,  no,  103 

Provisions  of  the  Edge  Bill,  423 
Provisions  of  Act  of   1873,  22a 
Public   Banks,  30 
Public  securities,   326 
Public  utility  bonds,   335 
Purchase  of   silver  bullion,  231 
Questions    for    Review,    at    end 

of   each   chapter 
Quick  assets,  proportion  of,  147 
Railway   stocks,    338 
Railroad  bonds,  333 
Rate  of  exchange,  the  266 
Rates,  foreign  exchange,  120 
Rates  for  loans,.  55 
Rates  of  discount,  288 
Rates    of   exchange,   quotations 

of,  271 


Real   estate  mortgages,  880 
Real    estate    securities,   329 
Reappraisal  of  farm   lands,  206 
Record  of  expenditures,  44 
Redemption  department,  Comp- 
troller's, 222 
Redemption  of  currency,  244 
Reference,  the  banker  as  a,  43 
Reports,   bank   examiner's,  221 
Reserve  bank  note  isaueji,  188 

RESERVE  BANKS,  board  of  di- 
rectors, 176 
corporate  power  of,  17B 
dividends,  178 
franchise  tax,  178 
officers  of,  168 
organiation  of,  172 

Reserve  Board,  FederaJ,  17^ 
Reserve  districts,  twelve,  164 
Reserves,  bank,  191 
"Reserves  to  be  maintained,  189 
Reserve  system,  federal,  163 
"Reserv'e  system,  state  banks  in, 

179 
Revenue  stamp  on  drafta,  293 
Rich,  expenditures  of  the,  314 
Roman  bankers  in  disrepute,  377 
Rules,  clearing-house,  158 
Rules  of  credit  science,  142 
Run  on  a  bank,  the  first,  410 
Safe  deposit  for  valuables,  45 
Safe-keeping    of   money,    38 
Safety  deposit  vaults,   45,  73 
Safety  devices  for  checks,  80 
Sales  and   assets,   148 
Sales  of  gold,  244 
Saving  and  unsaving,  the,  805 
Savings-bank  deposita  ae  cap- 
ital, 302 
Savings  banks,  36,  67 
Science  of  credit,  142 
Securities  for  investment,  325 
Security  for  bank  notee,  264 
Seigniorage,  130,  239 

fet-off.  a.   106 
hareholders,   355 
Shillings,  the  first,  25 
Shipments,  gold,  262 
Signature,  a  "mart,"  10§ 
Signatures,   91 
Signature  to  a  note,  99 
Silver  Act  oi  1878,  23f 


INDEX 


447 


Silver  Act  of  1890,  238 
SILVER  bullion,  purchase  of, 
231 

certificates,  234,  250 

coinage,  228 

coinage  of,  241 

coins,  235 

dollars,  coinage  of,  230 

dollars,  issue  of,  237 

subsidiary  coins,  236 

Single-name  paper,  109 
Sixteen  to  one,  meaning  of,  239 
Speculation  and  investment, 

329 
Stamped  metals,  first,  23 
Standard  bullion,  239 
Standard  of  value,  17,  27,  231 

STATE  BANKS,  33,  51 
growth  of,  392 
in  resei^e  system,  179 
nationalization   of,   179 

State  bonds,  327 

STATEMENTS,  analysis  of,  141 
for  credit,  58 
from  borrowers,  139 
inaccurate  and  dishonest,  144 
of  condition,  153 

State  saving,  beginning  of,  306 
State  saving,  method  of,  307 
State,  what  is  the?  308 
Sterling  exchange,  264 
Sterling   exchange,   convenience 

of,  295 
Stock,  listing  of,  348 
Stock,  preferred,  355 
Stock,  sale  of,  357 
Stock,  shares  of,  354 
Stockbrokers,   352 
Stock  companies,  353 
Stock  exchange,  the,  346 
Stock  Exchange,  London,  347 
Stock  exchanges,  technical  terms 

of,  349 
Stocks  as  investments,  338 
Stocks,  miscellaneous,  342 
Stopping  payment,  87 
Subsidiary  silver,  236 
Suggestions  to  bank  clerks,  74 
Suggestions  to  bank  depositors, 

93 
Superviflioo  of  banks,  217 


Surplus  fund,  356 

Syndicate,  stock,  351 

Table  of  Contents,  9-15 

Tender,  legal,  108,  233 

Test  of  exchange,  the,  116 

Third  parties,  title  of,  97 

Three-party  draft,  103 

Time,  saved  by  banking,  42 

Title  of  third  parties,  97 

Trade  dollars,  242 

Transactions,  complicated  ex- 
change, 294 

Transmission  of  money,  41 

Transmission  of  money,  early^ 
411 

Treasury  notes,  251 

Treasury  notes,  new  issue,  166 

Treasury  stock,  356 

Trust  companies,  36,  73 

Trust  stocks,  339 

Uniform  credit  tests,  failure  of, 

149 
Uniform  statement  blank,  137 

United  States,  banking  power 

of,  197 
United   States,   Bank  of  the, 
34,  391 

United  States  ,monetary  sys- 
tem of,  228 
United  States  notes,  247 

United  States,  paper  money  of, 
247 

Unit  of  value,  U.  S.,  229 

Unlimited  coinage,  243 

U.  S.  COINS,  denominations  of, 
245 
weight  of,  245 
fineness  of,  245 

Use  of  crude  metals,  21 
Use  of  instruments  of  credit,  54 
Use  of  metal  as  money,  20 
Use  of  money,  17 
Usury  and  its  penalty,  60 
Utility  of  banks,  29,  37 
Valuables,  safe  deposit  for,  46 
Value  in  exchange,  27 
Value  in  use,  27   , 
Value,  meaning  of,  26 
Value  of  Federal  Reserve  sys- 
tem, 165 
Value  of  the  accountant,  143 
Value  of  the  engineer,  144 
Value,  standard  of,  231 


448 


INDEX 


Value  received,  96 

Value,  unit  of,  U.  S.,  229 

Values  of  coins,  25 

Various  metals  used  as  money, 

Vaults,  safe  deposit,  73 
Venice,  bank  of,  381 
Violations   of   Farm    Loan    Act, 

Vouchers,  return  of,  107 
Waiver  of  demand  and  notice. 

Wash  sale,  352 


Watered  stock,  356 
Waterworks  bonds,  336 
Weij^ht  of  U.  S.  coins,  245 
What  is  a  banker?     29 
What  is  a  capitalist?  300 
When    are    accounts    due?     102 
When  fij,'ures  and  virords  dis- 
agree,  81 
When  interest  accrues,  56 
Who  is  a  bona-fide  holder?     106 
Withdrawal  of  money,  78 
Words  and  figures  on  checks,  81 
World's  currencies,  125 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 
This  book  is  DUE  on  the  last  date  stamped  below 


v  \  s 


Form  L-9 
20m-l,'42(S31W 


HG 

173         Russell  - 
_R91h Bflriking 


1922        credit. 


I 


DEMCO  2S4N 


>VERDUfc 


Hl'illlMlimfiimMm,^.°.'°'^'^^  L'BRARY  FACILITY 


AA    000  567  376    9 


^ 


HG 
173 
RSlb 
1922 


